How will HMRC mandating the payroll of benefits in kind from April 2026 affect limited companies?

On January 16th 2024, in a policy paper entitled “Simplification Update – January 2024,” the government said it will mandate the reporting and paying of Income Tax and Class 1A National Insurance Contributions (NICs) on benefits in kind via payroll software from April 2026.

The dreaded M-word...

‘Mandate’ here means to make mandatory – not a word that usually has positive connotations. Indeed, placing a mandatory burden on employers, seems counter-intuitive to what the update purported to be about -- tax simplification, writes chartered accountant Graham Jenner of Jenner & Co.

But are you the sort of person who reads the last page of the book first? If so, and if you like happy endings, then you might want to scroll down to the last section of this article, “The Final Page.” Of course, if you do that you’ll miss out on truly understanding how the government mandating the payroll of BIKs affects limited companies. And you wouldn’t know how this story reached the ending, or even whether you agree with the ending!

What is a benefit in kind?

A benefit in kind (or benefit-in-kind or ‘BIK’ for short), is effectively some kind of benefit, other than money, that an employer provides to an employee. This might be a car, health insurance, or gym membership.

In the context of a limited company or Personal Service Company (PSC), the PSC is the employer, and the employee is the director of the company.

What is the normal treatment?

If a benefit in kind is provided, then the normal treatment is to report that benefit to HMRC at the end of the tax year on a Form P11D.

For employees who do not have to submit a Self-Assessment Tax Return (SATR), HMRC then seeks to collect in the following year. However, as most directors of PSCs are required to submit a SATR, the tax on the benefit is included in the overall calculation for the tax year.

What does the change to P11D obligations mean?

The idea is that all benefits in kind will now be taxed through the payroll -- by the employer.

Cynics might argue that this is another case of businesses having to do the work of the taxman! While that is arguably true, if the payroll software companies can incorporate the April 2026 changes in a way that enables processing through the payroll in a fairly straightforward manner, employers will perhaps happily trade that for the aggravation of having to prepare and submit forms P11D each year! So it’s not just us accountants who are probably quietly quite happy at the prospect of the need to complete a form P11D being removed as a result of this HMRC change.

But the taxman stands to benefit too! Significant cost savings will be achieved by HMRC.

The tax department says mandating the payroll of BIKs will:

1. Simplify the tax affairs of three million people…

• it probably will once everything is working properly.

2. …and reduce the need for them to contact HMRC

• it probably will – queries will instead be raised with the employer!

3. While also reducing administrative burdens for thousands of employers…. 

• it probably will - in time, not initially though.

4. …and it will reduce the administrative burden on HMRC

• it definitely will!

5. And it will remove the need for four million end of year returns to be submitted to HMRC.

• Yes, and that has to be a good thing!

What about contractors' PSCs and P11Ds?

It is all very well talking about the millions of people and forms affected, but all the PSC shareholder/director really wants to know is; How will the mandating  of BIKs affect them, as limited companies?

Well, I would imagine that most P11Ds for PSCs are completed by the company’s accountant. We certainly include the preparation of the P11D as part of our fixed price, all-inclusive package for PSC contractors.

On the face of it, accountants may be reluctant to deal with the additional work without an additional fee. In practice, provided the accountant is aware that a benefit has been provided, they can build into their systems an efficient way to incorporate the amount of the benefit into the amount processed through the payroll.

Will you need to find a method of making your accountant aware of the BIK provision from April 2026?

Where the accountant prepares the VAT return for the PSC, sight of the bank statements will enable the accountant to identify the majority of BIKs provided.

Otherwise, some other method of making the accountant aware of the provision of a benefit will need to be found. It remains to be seen how quickly HMRC will require the benefit to be processed through the payroll.

In reality, and given the long lead time, the proposed changes from April 2026 will not have too much impact on the average PSC shareholder/director -- other than that tax on benefits will be paid earlier than they are currently.

When will the tax be paid to HMRC?

Ongoing benefits such as health insurance are likely to be taxed each month on the monthly benefit, even if the employer pays an annual lump sum.

But one-off, large benefits in kind are more problematic. It remains to be seen whether the legislation will require the benefit to be taxed in ‘one hit,’ at the time it is provided.

The issue is that the employee isn’t receiving money out of which the tax can be paid. Instead, they receive a non-monetary benefit on which they have to pay the tax, from their salary which is already subject to its own tax and national insurance.

One further piece of good news for PSCs

Relatively few benefits in kind are provided by PSCs to the shareholder/director.

The reason for this is that the Class 1A national insurance (payable by the company) and the tax (payable by the shareholder/director) is more than the overall tax payable if the shareholder/director pays for the benefit themselves, out of a dividend paid by the company.

The Final Page

So, eventually, the PSC shareholder/directors, and the taxpayers as a whole, realised that despite the scary-sounding ‘m-word,’ making something mandatory wasn’t such a bad thing, after all!

Lastly, telling and talking it over…

If for any reason you don’t agree and are against the end of P11Ds, HMRC say they will consult stakeholders on the new mandatory payrolling and that draft legislation will be published later this year. So you’ll get to tell the taxman that you’re not going to benefit or that he’s not being kind! For all other BIK queries, including prepping for the change, talk to your accountant.