If you provide perks like company cars, private medical insurance, or gym memberships to your employees, you need to consider how these benefits in kind (BIKs) are taxed.
One of the simplest ways to handle this is through payrolling – but many business owners are still using the traditional P11D forms to report BIKs.
There’s nothing wrong with this approach, per se, but it makes things far more complicated and, arguably, leaves you open to mistakes and compliance issues.
I would argue, as I think most accountants would, that you should be using your payroll systems to report BIKs.
What is payrolling BIKs?
Traditionally, BIKs were reported via P11D forms, and employees would later pay tax through their PAYE code.
However, this system can be confusing and often resulted in unexpected tax bills.
Payrolling BIKs offers a much smoother alternative.
With payrolling, you tax benefits in real time – adding the taxable value of the benefit to your employees' payroll each month.
This means they pay the correct tax immediately, rather than waiting for HM Revenue & Customs (HMRC) to adjust their tax code the following year.
How to payroll BIKs?
If you want to payroll benefits instead of using P11Ds, here’s what you need to do:
- Register with HMRC – You must register before the start of the tax year (by 5 April) via HMRC’s Payrolling Benefits in Kind (PBIK) online service.
- Choose which benefits to payroll – Not all benefits have to be included, but if you payroll a benefit, you must do it for all employees who receive that benefit.
- Calculate the taxable value – The cash equivalent of the benefit is divided across the tax year and added to your employees’ taxable pay. This ensures they pay tax through PAYE each month rather than through end-of-year adjustments.
- Adjust for leavers and changes – If an employee leaves mid-year, you must ensure they are taxed correctly for the benefits they received while employed.
- Still report Class 1A National Insurance (NI) – While payrolling removes the need for P11Ds for taxed benefits, you must still submit a P11D(b) form to report Class 1A NI contributions.
Obviously, the alternative to all this complicated work is to outsource it to a payroll specialist.
We handle all the above for many of our clients and they have said it’s been invaluable.
Compliance requirements
To stay compliant and avoid HMRC penalties, you need to make sure you:
- Register on time – You cannot backdate payrolling, so if you miss the deadline, you’re stuck with P11Ds for another year.
- Inform employees – You must let your employees know that their benefits are being taxed through payroll (they won’t get a P11D for these).
- Report Class 1A National Insurance – Even if you payroll benefits, you must still submit a P11D(b) by 6 July and pay Class 1A NI by 22 July.
These requirements are of the upmost importance and failing to complete one of them can land you in trouble with the Revenue.
Accurate record-keeping is also key, and you should:
- Include BIKs on payroll software – Your payroll system should be set up to handle taxable benefits correctly.
- Keep detailed records – Maintain clear documentation of the benefits provided, their taxable values, and any adjustments.
- Provide clear payslips – Employees should be able to see how their benefits are taxed.
Having said that, we maintain that payrolling BIKs is simpler, clearer, and saves hassle for both you and your employees.
By taxing benefits in real time, you avoid tax code surprises, reduce administrative burdens, and improve cash flow planning.
So, if you’re still handling benefits the old-fashioned way, it might be time to ditch the P11Ds and embrace payrolling.
