Benefits in Kind through Payroll
Contents of this Blog Post
Introduction
Many companies have started reporting benefits in kind through payroll this April ahead of the proposed withdrawal of the P11D from April 2026.
HMRC have today announced (29th April 2025) that the compulsory payrolling of benefits will be delayed until April 2027. Many people have struggled this April as processing benefits through payroll is not quite the same as a P11D and I am sure many would have preferred to delay another year.
Although there were many new employers to the payrolling of benefits this year many employers have already successfully embraced the change. As we have seen a variety of issues we thought we should share some tips we have spotted from companies that have made a relatively seamless transition.
1. Report benefits in kind through payroll is not quite the same as a P11D. Within payroll we split benefits into two categories: cars and not cars. The total benefit to the employee is reported in payroll not the total less anything made good as in a P11D
2. Benefits in payroll could change by April 2027 but can be very straightforward if approaching calmly and with clarity of what needs to be achieved.
Benefits in Kind are subject to tax and employer’s Class 1A National Insurance. Even if benefits are reported via payroll there is still the requirement for reporting the P11D(b) summary to calculate the Class 1A liability.
Please use this guide as a starting point, if you have further questions or want to clarify an individual position please contact us or your tax advisor.
Tax Codes
Where P11Ds have been used the tax codes will be reduced to account for tax owed from previous years and tax anticipated and so paid on account for the current year. When an employer moves from P11Ds to reporting via payroll the tax codes should rise as there is no longer any need to collect tax on account for the current year as it is reported and deducted in real time.
As currently the intention to payroll benefits is reported to HMRC in the preceding tax year all employees should see their tax codes rise from April. Tax codes will still be influenced by things like other income or tax owed from previous years.
Company Cars
Reporting company cars through payroll is a little painful the same way as using a P11D - it is the only benefit we currently make an additional charge for. Full details are required including licence plate, registration date, benefit value (P11D value) etc.
The date the car is available from is important, this must be correct. If the date is in a previous tax year then a P11D is required or it may be possible to make a prior year FPS (Full Payment Submission – part of Real Time Information) through payroll. The date the car ends is also important but we find this is better left until the car is stopped rather than trying to predict the date as things do change.
If an employee does not have the vehicle for the whole period it may be possible to reduce the benefit in kind due but the period without the vehicle must be 30 consecutive days or greater.
Salary Sacrifice Electric Vehicles
Although there is a lot of confusion around electric vehicles if the company is providing the vehicle then it is still a company car. The car needs to be reported via P11D or payroll. Salary sacrifice does not negate the fact the vehicle is a company car and needs to be reported as a benefit. Some of the marketing is unclear and employees and employers become very confused over what is required. Is the company providing the employee a car including for personal use? If the answer is yes then we cannot see an occasion when this would not be considered a company vehicle requiring benefit reporting and tax calculations. Fully electric vehicles, with zero emissions, do currently enjoy low benefit in kind rates although these are increasing each tax year.
Company Car Fuel
If the company pays for the fuel for the company car and the employee does not make good then the flat rate company car fuel benefit will apply. This can be divisive even if the fuel is normally reported on the P11D. Employees will see how much benefit is being applied on their payslip and for many this will be more than the fuel they use in their car. Speak to employees about what is best for them. If they pay at the advisory rate no benefit is reported via payroll, there is no option to report fuel as 100% made good it is just not reported.
Fuel for Electric Cars and Vans
It is not possible to fuel an electric vehicle and electricity does not count as fuel. Usually the company can pay for the electricity for company electric vehicles without creating a benefit. This may change but currently (April 2025) companies can provide electricity for company vehicles with no tax or National Insurance applying.
Company Vans
These fall into the “not cars” category and are at a flat rate. No van details are required and it is just the fact there is a van and then the flat rate that is used. This is the same for van fuel.
Regular Benefits such as Private Medical Insurance
Other benefits all fall under “not car” and are grouped together on the FPS reported to HMRC in the same way as a taxable pay. These are usually very simple to report through payroll and it is just the premium paid by the employer that is reported. If the premium changes mid-way through the tax year the benefit in kind is changed from that date too, there is no need to pro rata.
Deductions for Dependants
This can be slightly more tricky as the total premium is not necessarily the same as the benefit in kind reported to HMRC. If dependants are not made good by employees and the employer is responsible for the whole premium then the whole premium will remain as the reported benefit. If the employee makes a payment for their dependants then it depends on how for the impact on the benefit in kind
Payment from net pay
If the employee makes a payment from their net pay then it is the reduced premium that is reported as a benefit in kind. This was the more common (possibly only) method for employees to add their dependants where the employer did not make the payment.
Eg consider a total premium of £50 per month and a monthly pay frequency
Employee premium = £30
Dependants = £20
This would show on the payslip and be reported to HMRC as a £30 benefit in kind and a £20 net deduction.
Payment via Salary Sacrifice
Salary sacrifice is where the employee exchanges part of their salary in exchange for a benefit, in this case their dependants on the medical insurance. Now the whole premium is back to being reported as a benefit as the whole premium is paid by the employer with the employee not making good at all. The employee has exchanged some of their salary for the benefit.
Eg again consider a total premium of £50 per month and a monthly pay frequency
Employee premium = £30
Dependants = £20
This would now be a benefit in kind of £50 reported to HMRC, there would be a £20 reduction in gross salary reducing the total pay subject to National Insurance reported to HMRC by £20, tax would not be affected.
Tax is not affected because £20 reduction in gross salary is offset by £20 increase in the benefit in kind.
Irregular Benefits in Kind
So far we have had relatively few irregular benefits in kind reported via payroll. A benefit line could be set-up then the deemed value reported each month. These benefits can be more complex but as long as a method is established they should be no more complex than any other irregular payment.
End of the Tax Year
The employee should be given information on the total benefits provided and therefore the total benefits subject to tax. This could be just on the payslip or a separate benefits letter. The employer also needs to complete the P11D(b) by 6th July of the following tax year.
Benefits that currently cannot be reported via payroll
Currently employer provided living accommodation and beneficial loans cannot be reported via payroll. This is because the calculation is more complex but we imagine there may be something available by 2027. If you want to check on HMRC what benefits you have registered for then you start the process again and you will see all sections currently selected.
Salary Sacrifice
We have come across a number of benefit portals pushing salary sacrifice as a method of saving money and receiving benefits. This is not without pitfalls however as any reduction in pay subject to National Insurance will have an impact on National Minimum Wage calculations as well as statutory calculations such as maternity pay. Most benefits are not allowable as a salary sacrifice arrangement so need to be reported, the common ones which are exempt are pensions and cycle to work schemes.
Electric Vehicle schemes are still a company car scheme and although currently the rates are very low for electric vehicles they are going up each year. There will be a difference between the salary sacrifice amount, usually the lease, and the benefit in kind amount which is based on the value of the vehicle and the current benefit percentage rate. This causes a lot of confusion and may be best to consider as two separate transactions – the salary sacrifice and then the car benefit.