HMRC introduces compulsory payrolling of BIKs

Feb 7, 2024 | Brewers news, Business, Employers, Tax

In a significant move towards digitalising the tax system, the government has announced that employers must report and pay Income Tax and Class 1A National Insurance Contributions (NICs) on benefits-in-kind (BIKs) using payroll software from April 2026.


This initiative is part of a broader government ambition to fully digitalise the reporting of benefits-in-kind provided to staff, aiming to simplify the tax process for millions of employers and taxpayers.


The new mandate is expected to streamline the tax affairs of approximately three million people, significantly reducing the need for direct contact with HMRC.


For employers, the change promises to lift a considerable administrative burden. According to HMRC, the digitalisation and simplification of this process are set to eliminate the requirement for four million end-of-year returns currently submitted to HMRC.


Submitting the P11D(b) form

Currently, submitting the P11D(b) form is still a requirement for employers reporting and paying Class 1A NICs, even if the benefits are taxed through the payroll.


Announcing the measure in its latest simplification update, HMRC also revealed that the reporting and paying of Class 1A NICs will move to be processed via the payroll software.


Furthermore, the tax authority said it is committed to engaging with stakeholders to refine the proposals, ensuring that the design and delivery of this new system are well-informed and practical. As part of the standard tax legislation process, draft legislation detailing this mandate will be published later in the year.


In the policy paper, HMRC said:


“Each year, HMRC receives 1.1 million claims for tax relief from employees on their expenses. These claims are submitted through existing online services, or via digital or paper forms, resulting in some claims being manually processed.


“To simplify the process for many employees claiming tax relief on their expenses, and for HMRC to automatically process claims, the government is designing a new, online service for employees to claim tax relief on all of their expenses in one place, meaning employees will get relief sooner. HMRC will provide further details later this year.”


If you do not include employee benefits on your payroll but are considering starting in the upcoming tax year, you have until 05 April 2024 to register. You can find helpful information on GOV.UK’s guidance pages.


What is a benefit-in-kind?

A benefit-in-kind (also known as a BIK) is any non-monetary perk or service with a financial worth that an employer provides to an employee for personal use. Termed as ‘fringe benefits’, these non-cash provisions do not meet the criteria of being ‘wholly, exclusively, and necessary’ for the conduct of business, and are thus recognised as benefit-in-kinds.


BIKs attract tax due to their monetary valuation, effectively augmenting the traditional cash remuneration. The process of taxing these benefits is instrumental in averting the replacement of salary with other forms of compensation, assisting the tax authorities in securing the appropriate amount of revenue.


A broad range of provisions can be classed as BIK, including (but not limited to) benefits such as company vehicles or private medical insurance. These benefits contribute to the employee’s overall income and tax liability, and employers may need to report them for tax purposes.


Employers and taxpayers can expect to receive further details on this development through HMRC’s standard communication channels, including employer bulletins. 


We can help

If you would like help with these proposed changes, or with your existing payroll requirements, please get in touch.

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