Mandatory payrolling of BIKs: FST responds to EPG letter
By Justine Riccomini, Head of Tax (Employment and Devolved Taxes)
20 March 2024
We explain the things that employers will have to consider to enable them to payroll all benefits in kind from April 2026, and highlight a letter sent to the Financial Secretary to the Treasury.
The clock is ticking
Payrolling all benefits in kind (BIKs) will become mandatory from 6 April 2026, giving employers much to think about and prepare over the next 450 working days. Two years is a very short period in which to consult on, create and implement the legislative provisions; change HMRC Real Time Information systems; train staff, inform all employees and get their buy-in; and successfully submit the first set of returns.
The considerations that agents will need to discuss with clients can be broken down into five main headings, as follows:
All benefits in kind
Currently, the employment taxes legislative provisions within ITEPA 2003 don’t facilitate the payrolling of living accommodation benefit and beneficial loans. All other BIKs can be payrolled voluntarily. Many employers do this already, by declaring the Class 1A NICs on the P11D(b) and submitting P11Ds for the living accommodation and beneficial loans separately as part of their tax year filings. However, many employers still prefer to submit online P11Ds in the traditional way, either by preparing them themselves or asking their agent to do this for them. From 6 April 2026, P11Ds will be abolished, resulting in the mandatory online payrolling of BIKs.
ICAS is part of a key stakeholder discussion group, the Employment and Payroll Group (EPG), on how the transition might work. Most experts around the table have commented that the legislation at Part 3, Chapter 5 of ITEPA 2003 (covering living accommodation) and Part 3, Chapter 7 of ITEPA 2003 (covering loans) needs upgrading to make it fit for the future and easier for employers to work out the taxable value of the BIK.
However, HMRC is currently proposing not to change the underlying legislation. This will mean that the burden of performing calculations for BIKs in each pay period would fall on the employer. ICAS has made strong representations to the HMRC policy team, pointing out that the legislation must be changed first to reduce complexity in the years following the mandation. It may be the case that the legislation never gets changed once mandation comes in, if it isn’t changed beforehand.
Software
As all BIKs will need to be processed through payroll software in future, employers will need to ensure that their provider is up to speed. Software developers first need to understand the changes being made before they can design and build the necessary programmes, and carry out pilots and testing of payroll software changes.
Employee cash flow
Employers will also have to consider how many BIKs can be processed through any one pay period, which will result in deductions from pay. Note that under the Income Tax (PAYE Regulations) 2003 the amount of tax deducted from a payment of salary cannot exceed 50% (this is known as the ‘overriding limit’).
Individual taxpayers who have been in receipt of BIKs in 2025/26 will be starting to pay the tax through their tax code on those BIKs in 2026/27. If 2026/27 BIKs are then payrolled at each pay interval, this will lead to an overlap situation where they are paying last year’s and this year’s tax simultaneously, until the overlap period ends at the end of the 2026/27 tax year. In some cases, this may result in hardship, and employers will need to consider what steps they might be able to take to mitigate that possibility.
Student loan repayments
The income on which student loan repayments is assessed doesn’t include BIKs (unless these attract Class 1 NICs). Employees making student loan repayments need to complete a Self-Assessment return. But, where benefits are payrolled, the Self-Assessment process is unable to distinguish between BIKs that are expressed as taxable income by means of the benefits code and any balancing PAYE income, and an anomaly arises. The result is that student loan repayments appear as if they are due on the whole amount, including payrolled benefits. In the absence of changes to HMRC systems, which would be the best route, a suitable workaround needs to be found to overcome this anomaly.
Employment legislation
Employers should be aware that contractual terms may need to be revised, along with salary sacrifice and flexible benefits/reward statements. Employment law advice may need to be sought in this regard to ensure employers are not falling foul of any traps. It is also advisable in unionised settings for employers to formulate a way forward with the union.
Training and administrative focus
Payroll and HR staff will need to understand the changes being made so that they can handle queries and make changes to employee handbooks and intranet information, as well as explain payslips to employees. How will new starters and leavers be handled? If someone has a company car with a high BIK value, how will the balancing charge be treated when they leave the employment? Will they be keeping the car, or handing it back? Will they be in receipt of a termination payment? All of these questions will need to be considered.
Engagement letters and fees
Engagement letters and service level agreements will also need to be reviewed if you run an outsourced payroll bureau. This is so that services can be defined, responsibilities specified and work fully costed out. The loss of revenue from P11D work will hit some accountancy practices fairly hard, and this may not be able to be fully recouped through charging additional amounts per payslip for those employees who receive BIKs. Employers often miss the detail when it comes to preparing payslips and fail to appreciate the work that goes on behind the scenes. Historically, many accountancy practices have sold payroll services as a loss leader – perhaps it is time to change this perception once and for all.
Further thoughts
There are numerous other considerations such as employee communications, employees working under ’modified payroll’ arrangements, double taxation agreements and NICs certificates of coverage mechanisms.
Draft legislation will be published later this year for consultation as part of the tax legislation cycle. It will be interesting to see what is planned and what effect the payrolling of BIKs has on the tax-geared penalties regime, as well as the inevitable employer compliance focus that will accompany it.
We hope that the PAYE Regulations and guidance will also be amended to take account of what an employer is permitted to deduct through payroll to ensure that no employee falls into hardship.
We wrote a letter on behalf of the EPG to the Financial Secretary to the Treasury (FST) to raise all of these issues, which has since prompted a response.
