Payrolling employee benefits: What employers need to know

Some employee benefits provided by employers are treated as Benefits-in-Kind (BIK), the most common we deal with are:

• Private Medical Insurance
• Health Cash Plans
• Dental Cover
• Group Critical Illness

This means the employee will need to pay Income Tax on the value of the premium the employer pays, to cover that employee. The employer will also pay additional National Insurance on the premium of the employee benefit.

Typically, these are reported annually using a P11D; however, we’re seeing more employers choosing to payroll the benefits. More fundamentally however, is that it’ll become mandatory to payroll BIKs from 2027 (previously this was going to be enforced from April 2026).

What is payrolling

Typically, employee benefits like Private Medical Insurance or Health Cash Plans, known as Benefits-in-Kind, require employers to report them on a P11D form at the end of the tax year.

Payrolling alters this. Instead of year‑end reporting, the taxable value of BIKs is included directly in payroll with each pay run (i.e. each month). This enables real‑time deduction of Income Tax, simplifying the process and avoiding the frequent changes in tax codes each year for staff (which happens after the P11Ds are submitted).

When does it become mandatory?

Originally set to begin in April 2026, this has been deferred to April 2027, following stakeholder feedback and the publication of a technical update in April 2025 (GOV.UK).

Between now and then, employers have the option to voluntarily payroll BIKs, which could be a beneficial way to pilot the process while P11D submissions are still accepted.

Key implications for employers

Payroll software and data collection

Your payroll system will need to be provided with more data to report BIKs. The monthly cost of each employee benefit can be provided by your Employee Benefit Consultant. This will then need to be updated when:

• A renewal has been completed
• An employee joins the company
• An employee changes their benefit or is entitled to a new employee benefit

Most payroll systems can accommodate this, but it's worth checking.

HMRC expects employees to be told before the start of the tax year in which you first payroll the benefit. Employers will also need to inform HMRC before the start of the tax year that they intend to payroll benefits too.

Employee communication and payslips

Employees will see the employee benefit/BIKs and associated tax on their payslips each month. HMRC will remove BIKs from tax codes (except underpayments) to avoid duplication.

Employers will also need to communicate the following:

• That the employee benefit will be payrolled – explain which specific benefits are included and from what date.
• That they will not get a P11D for that benefit anymore – employees still need to know that certain other benefits (if not payrolled) will continue to appear on a P11D.
• That the value of the benefit will be included in their taxable pay each pay period – this increases the taxable pay figure for Income Tax purposes but does not increase actual cash pay.
• That HMRC will adjust their tax codes – so the benefit is not taxed twice. If other benefits remain outside payrolling, HMRC will retain those in the tax code.

Conclusion

Payrolling Benefits-in-Kind modernises and streamlines tax collection—but it’s a substantial shift in process and data collection. With careful preparation, employers can transition smoothly, reducing administrative burden and ensuring compliance by April 2027.

Working with your Employee Benefit Consultant can help to ensure the data you need is provided timely and accurately.

The information provided is for general guidance only and reflects our understanding of HMRC rules at the time of writing. It does not constitute legal, tax, or accounting advice. Employers should seek specific advice from their accountant or tax adviser to ensure the approach taken is appropriate for their circumstances.