Expenses and benefits-in-kind in UK payroll
Reviewed by Mellow Editorial Team, HR & payroll content team
Expenses and benefits-in-kind (BIK) sit outside regular salary payments, but they still create tax and reporting obligations for most UK employers. Get the process wrong and you risk HMRC penalties, unexpected tax bills for your employees, and backdated NIC liabilities.
What counts as an expense or benefit-in-kind
A benefit-in-kind is anything of value you provide to an employee — or a member of their family — that is not straightforward cash salary. Common examples include company cars, private medical insurance, interest-free or low-interest loans, gym memberships, and accommodation.
Expenses are slightly different. These are costs an employee incurs in doing their job and that you reimburse. Where the reimbursement covers genuine wholly, exclusively and necessarily incurred business costs — travel to a temporary workplace, for example — they are typically not taxable. Where they do not meet that test, or where you pay expenses without checking, they can become taxable benefits.
The practical distinction matters because it determines how and when you report, and whether Class 1 or Class 1A National Insurance applies.
How benefits are taxed
Most benefits-in-kind are subject to Income Tax for the employee and Class 1A employer National Insurance at 13.8% on their cash equivalent value. The cash equivalent is broadly the cost to you of providing the benefit, though some benefits — company cars in particular — have their own HMRC-prescribed valuation rules.
The employee pays Income Tax at their marginal rate: 20% (basic rate), 40% (higher rate) or 45% (additional rate). Tax is typically collected by adjusting the employee's tax code, which reduces their personal allowance of £12,570 accordingly. HMRC issues an amended code to you, and the adjusted amount is collected through payroll over the tax year.
Some benefits are exempt entirely — for example, certain employer pension contributions, workplace canteen meals available to all staff, and some transport schemes. Always check current HMRC guidance before assuming an exemption applies.
Payrolling benefits versus the P11D route
You have two routes for reporting most benefits:
Payrolling benefits in kind
You register with HMRC before the start of the tax year to tax benefits through the payroll in real time. The cash equivalent of the benefit is added to the employee's taxable pay each pay period, tax is deducted under PAYE, and the value is included in your Full Payment Submission (FPS) submitted on or before each payday under Real Time Information (RTI). Employees pay as they go and avoid an unexpected year-end bill. You still pay Class 1A NIC after the tax year ends.
P11D reporting
If you do not payroll a benefit, you must report it on a P11D form for each affected employee by 6 July following the end of the tax year. You also submit a P11D(b) — the summary of all Class 1A NIC due — by the same date, and pay the NIC owed by 19 July (22 July if paying electronically). The employee's tax is then collected through a revised code the following year, meaning there is always a lag.
Payrolling is generally cleaner for both employer and employee, but you must register in advance. You cannot switch mid-year for most benefit types.
Expenses: dispensations and checking
Before April 2016, employers needed a formal dispensation from HMRC to pay expenses without reporting them. That regime no longer exists. Instead, a statutory exemption covers qualifying business expenses — provided you have a checking system in place to confirm that what employees claim genuinely qualifies.
In practice, this means keeping receipts or records, having a clear expenses policy, and not simply rubber-stamping claims. If your process is inadequate and HMRC investigates, the exemption can be withdrawn and you may face a PAYE Settlement Agreement (PSA) or backdated liability.
For irregular or one-off items that do not fit neatly into exempt categories, a PAYE Settlement Agreement lets you pay the tax and NIC due on behalf of your employees, settling their liability in a single annual payment to HMRC. This is often used for staff entertaining or small gifts that exceed the trivial benefits limit.
Record-keeping and year-end obligations
You are required to keep records of all benefits provided and expenses paid throughout the tax year. At year-end, alongside your P11D submissions by 6 July, employees who receive benefits need to see the P11D value so they can check their tax position — and you must issue P60s to all employees still in your employment by 31 May.
Where you payroll benefits, a P11D is not required for those benefits, but you must still provide employees with a written statement of the benefits you have payrolled, and you must still file the P11D(b) to account for Class 1A NIC.
Keeping a clear schedule — what you provide, to whom, its cash equivalent value, and which reporting route you have chosen — is the simplest way to stay on top of obligations before deadlines arrive rather than scrambling at year-end.
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