The UK tax authority, HM Revenue & Customs (HMRC), is introducing significant changes to the way employees are taxed on benefits-in-kind (BIKs), such as company cars and private health insurance. These changes aim to streamline the taxation process and provide greater transparency for employees and businesses alike.
What Are Benefits-in-Kind?
A benefit-in-kind (BIK) is any non-cash compensation or service that an employee receives from their employer. Common examples include company cars, private health insurance, and interest-free loans. Employees are required to pay tax on the value of these benefits, while employers must cover associated National Insurance contributions.
How Are Benefits-in-Kind Currently Taxed?
At present, BIKs are declared to HMRC after the tax year ends on April 5th. HMRC then adjusts employees’ tax codes to ensure they pay the appropriate amount of tax via their salary in the following year. This system can sometimes cause confusion, especially for employees who change jobs, as tax payments may be applied retrospectively.
What’s Changing?
From April 2026, HMRC will require almost all BIKs to be processed through payroll systems in real-time. This means that taxes on these benefits will be deducted from employees’ salaries as they are received each month, rather than being calculated and adjusted in arrears. The move is expected to simplify tax calculations and improve clarity for both employees and employers.
Some organisations are choosing to adopt this system ahead of the official deadline to ensure a smoother transition. Employers are encouraged to review their payroll processes and make necessary adjustments in preparation for the change.
The Issue of Double Taxation
As the taxation of BIKs shifts from an annual to a real-time basis, some employees may find themselves paying tax on benefits from both the previous and current tax years in 2025/26. This is most likely to affect those receiving medical insurance, while company car benefits are typically taxed in the year they are provided.
While unavoidable, this temporary overlap may result in increased tax deductions for affected employees. Employers should inform their staff in advance to ensure they are aware of these changes before the April 2025 payroll cycle begins.
Preparing for the Transition
With the new system set to become mandatory in 2026, businesses should begin assessing their payroll capabilities now. Implementing the changes ahead of schedule could help minimise disruption and allow both employers and employees to adapt before the transition is enforced.
For further details on these upcoming tax changes, businesses and employees are encouraged to consult HMRC’s official guidance or seek professional financial advice.
