Benefit in kind tax: how UK employers pay it
Class 1A National Insurance on benefits in kind is charged at 15% for the 2026-27 tax year, a rate that rose from 13.8% on 6 April 2026 [1]. A fully electric company car carries a benefit in kind rate of just 4% of list price, while petrol and diesel cars sit between 17% and 37% [5]. Both figures shape what an employer owes when it gives staff something other than cash.
A benefit in kind is any non-cash perk an employer provides on top of salary: a company car, private medical insurance, an interest-free loan or a gym membership. The employer reports the taxable value to HMRC and pays Class 1A National Insurance on it. The employee usually pays income tax on the same value through their tax code.
This article sets out what counts as a benefit in kind, how the tax and National Insurance are calculated, the two reporting routes (the end-of-year P11D and in-year payrolling), the exemptions that remove the reporting burden, and the mandatory payrolling reform arriving from 6 April 2027.
Key takeaways
- Class 1A National Insurance on most benefits in kind is charged at 15% of the taxable value for the 2026-27 tax year, paid by the employer only.
- The employee pays income tax on the benefit, the employer pays the National Insurance, so a single perk can attract two separate charges.
- Benefits can be reported the traditional way on a P11D after the tax year, or payrolled in real time through each payrun.
- Payrolling most benefits in kind becomes mandatory for all employers from 6 April 2027, replacing the annual P11D for those benefits.
- Trivial benefits costing £50 or less, and several business expenses, are exempt and never reach a P11D.
What counts as a benefit in kind
A benefit in kind is a reward an employee or director receives that is not paid in cash. HMRC treats it as part of the employee's remuneration, which is why it is taxed. Common examples are a company car, private medical insurance, an interest-free or low-interest loan above £10,000, and childcare beyond the exempt thresholds [8].
The taxable value of most benefits is the cash equivalent, broadly the cost to the employer of providing the perk. For company cars the value is calculated differently, using the car's list price multiplied by an appropriate percentage tied to carbon dioxide emissions [5]. That distinction matters because an electric car and a high-emission diesel of the same price produce very different tax bills.
Not everything an employer provides is a benefit in kind. Items that are wholly for business use, such as a work phone or professional training, are exempt and never appear on a return [8]. The dividing line is private use: where an employee gains a personal advantage, a charge usually follows. Employers running HMRC-recognised payroll software can flag which items are reportable before the year-end scramble begins, and smaller employers handling their own benefits can manage them through a platform built for small business payroll.
How benefit in kind tax and National Insurance are calculated
A benefit in kind triggers two separate charges. The employee pays income tax on the taxable value at their marginal rate, collected through an adjusted tax code. The employer pays Class 1A National Insurance at 15% of the same value for the 2026-27 tax year [1]. Class 1A is an employer-only charge, so the employee never pays National Insurance on a standard benefit [2]. The same 15% rate that applies to employer National Insurance on salary now applies to benefits in kind.
The table below shows how some common benefits are treated. It assumes a basic-rate employee on a 20% income tax rate, with the employer paying Class 1A at 15%.
| Benefit | Reportable | Class 1A NI at 15% | Notes |
|---|---|---|---|
| Company car | P11D or payrolled | Yes | Value set by list price and CO2 band |
| Private medical insurance | P11D or payrolled | Yes | Cash equivalent is the premium |
| Interest-free loan above £10,000 | P11D or payrolled | Yes | Charged on notional interest |
| Work phone (business use only) | Exempt | No | No private-use charge |
| Trivial gift £50 or less | Exempt | No | Must meet all four conditions |
The company car example
Company cars are the most common reportable benefit and the most variable in value. The taxable figure is the list price (including VAT, accessories and delivery) multiplied by the appropriate percentage for the car's emissions [5]. For the 2026-27 tax year a fully electric car sits at 4% of list price, while petrol and diesel cars fall between 17% and 37%, rising by one percentage point each year toward a 39% cap [5].
A £40,000 electric car at 4% produces a taxable value of £1,600, generating £240 of Class 1A National Insurance for the employer at 15% [1]. The same car as a 37% petrol model would produce a taxable value of £14,800 and £2,220 of Class 1A. The emissions band, not the headline price, drives the cost.
The two ways to report benefits in kind
Employers have two routes for reporting benefits. The traditional route uses an annual P11D for each affected employee, submitted to HMRC after the tax year ends [8]. The modern route, payrolling, taxes the benefit in real time by adding its value to taxable pay on each payrun [3].
The table below compares the two methods on the points that matter to a payroll team.
| Feature | P11D (end of year) | Payrolling (in year) |
|---|---|---|
| When the employee pays tax | After year-end, via tax code | Each payrun, in real time |
| P11D per employee | Required | Not required |
| P11D(b) for Class 1A | Required | Still required |
| Registration | Not needed | Before 5 April for the next year |
| Tax code adjustments | Frequent | Fewer |
Whichever route an employer chooses, a P11D(b) is always required at year-end to declare and pay the total Class 1A National Insurance due across all benefits [3]. Payrolling removes the individual P11D forms but not the employer's National Insurance obligation.
Key dates for the P11D route
Employers using the traditional route work to a fixed set of deadlines. The P11D and P11D(b) must reach HMRC by 6 July after the tax year ends, and a copy of the information must reach the employee by the same date [8]. The Class 1A National Insurance must then be paid by 22 July (or 19 July if paying by post) [8].
Late filing carries a penalty of £100 per 50 employees for each month or part-month the P11D(b) is overdue, and late payment of Class 1A attracts interest plus further penalties [8]. Accountants handling these returns across many clients often rely on a multi-client payroll dashboard to track each scheme's deadline separately.
The shift to mandatory payrolling from 6 April 2027
The biggest change to benefit in kind reporting in years arrives on 6 April 2027. From that date, payrolling most benefits in kind becomes mandatory for all UK employers, with benefits reported in real time through the Full Payment Submission rather than on an annual P11D [4]. The P11D for most benefits will no longer be needed once the reform takes effect [3].
Two benefits are excluded from mandatory payrolling at first: employment-related loans and living accommodation. Employers can choose to payroll these voluntarily by registering, but a P11D and P11D(b) process is retained for them in the meantime [3]. The Class 1A National Insurance obligation continues regardless of which route is used.
Employers who want to start early can register voluntarily, but they must do so before 5 April for the tax year ahead, because payrolling cannot begin mid-year [3]. For software platforms and ERPs that handle UK payroll, the reform makes benefit reporting part of the core payrun rather than a year-end add-on, which is one reason an HMRC-recognised payroll API treats payrolled benefits as a standard FPS data item. Moonworkers, an HMRC-recognised UK payroll platform, calculates the Class 1A charge and feeds the benefit value into the Full Payment Submission as part of each payrun.
Benefits and expenses that are exempt
Several benefits and expenses are exempt and never reach a P11D. The £50 trivial benefits exemption is the most widely used: a gift costing £50 or less escapes tax and National Insurance provided it is not cash, not a reward for work and not contractual [6]. If the cost exceeds £50, the whole amount becomes taxable, not just the excess [6].
Directors of close companies face an annual cap of £300 on trivial benefits, equivalent to six £50 gifts across the tax year [6]. Several routine business expenses are also exempt, including business travel, work phones and professional training, where the employer pays an HMRC benchmark rate or reimburses the actual cost [8].
For minor or irregular benefits that are hard to allocate to individuals, an employer can use a PAYE Settlement Agreement (PSA). Under a PSA the employer settles the income tax and pays Class 1B National Insurance on the grossed-up value in a single payment, removing the need to report those items separately [7]. This suits things like staff entertainment or small one-off gifts spread across a workforce. A small business issuing the occasional perk for a single director can record it cleanly through an instant payslip generator rather than building a full benefits process.
Conclusion
Benefit in kind tax sits at the intersection of two charges that are easy to confuse: income tax paid by the employee and Class 1A National Insurance paid by the employer at 15% of the benefit's value. The reporting machinery around those charges is changing, moving from an annual paper exercise to a real-time entry on every payrun. The exemptions, the company car emissions bands and the deadlines all stay the same, but the route the data travels is being rebuilt.
The mandatory payrolling reform from 6 April 2027 marks the clearest signal of where UK payroll is heading. Benefit reporting is becoming part of the ordinary payrun rather than a separate year-end task, and the platforms that already treat a benefit as a standard data item in the Full Payment Submission will absorb the change without disruption. For employers and the software they rely on, the work now is making sure benefits flow through payroll as cleanly as salary already does.
Frequently asked questions
Do employees pay National Insurance on benefits in kind?
No. For a standard benefit in kind, the employer pays Class 1A National Insurance at 15% of the taxable value for the 2026-27 tax year, and the employee pays only income tax on the benefit through their tax code [1]. The employee's National Insurance is unaffected by most benefits, which is a frequent point of confusion on payslips.
When is the P11D deadline for benefits in kind?
The P11D and P11D(b) must reach HMRC by 6 July following the end of the tax year, and employees must receive their copy by the same date [8]. The Class 1A National Insurance is then payable by 22 July, or 19 July if paying by post. Missing the filing deadline triggers a penalty of £100 per 50 employees for each month the return is late.
Is payrolling benefits in kind compulsory?
Payrolling is voluntary up to and including the 2026-27 tax year, but it becomes mandatory for most benefits from 6 April 2027 [4]. Employment-related loans and living accommodation are excluded from the mandatory rules at first and keep a P11D process [3]. Employers wanting to payroll early must register before 5 April for the tax year ahead.
What benefits are exempt from benefit in kind tax?
Trivial benefits costing £50 or less are exempt, provided they are not cash, not a reward for work and not contractual [6]. Business travel, work phones used only for work, and professional training are also exempt where the employer pays an HMRC benchmark rate or reimburses the actual cost [8]. Minor or irregular items can be settled instead through a PAYE Settlement Agreement.
