The way employers report benefits in kind is changing.
For many years, employers have reported taxable benefits provided to employees after the end of the tax year, usually through forms P11D. However, HMRC is moving towards reporting more of these benefits through payroll in real time.
This means that, rather than employees receiving a tax adjustment after the end of the year, the taxable value of certain benefits will be processed through payroll during the tax year.
The change is being introduced in phases. From 6 April 2027 to 5 April 2028, mandatory payrolling will apply to company cars, car fuel, vans, van fuel and employer-provided medical benefits. Mandatory payrolling for most other benefits is expected to follow from April 2028, while employer-provided living accommodation and beneficial loans will remain voluntary.
What does payrolling benefits actually mean?
Payrolling benefits means adding the taxable value of an employee’s benefit to their pay each pay period, so the correct amount of tax can be collected through PAYE.
For example, if an employee receives private medical insurance costing £600 for the year and they are paid monthly, £50 would be added to their taxable pay each month. The employee would then pay tax on that amount through payroll during the year, rather than dealing with it after the tax year has ended. This example is included in our Summer Pay Less Tax newsletter.
What are the benefits for employers?
One of the main advantages is that employers should have fewer year-end reporting obligations for benefits that are payrolled.
Currently, many benefits are reported after the tax year using form P11D, with a deadline of 6 July following the end of the relevant tax year. Under payrolling, the aim is to move much of this reporting into the normal payroll process instead.
For employers, this could make benefit reporting more streamlined in the long term. However, the transition will need careful planning.
What are the challenges?
Although the system may reduce year-end admin, it also means employers will need to be much more organised throughout the tax year.
Businesses will need to know when an employee starts receiving a benefit, what the taxable value of that benefit is, and how it should be split across the remaining pay periods in the tax year.
This could create challenges where benefits change during the year, where employees join or leave part-way through the year, or where the value of a benefit is not known at the start and a reasonable estimate has to be used.
Payroll teams will also need to be told about benefits quickly so they can be processed correctly and on time.
Class 1A National Insurance will also change
At the moment, Class 1A National Insurance on benefits is usually paid after the end of the tax year.
Under the new system, Class 1A National Insurance will move into real-time reporting and payment for the relevant benefits, meaning it will be dealt with during the year alongside normal payroll reporting. HMRC’s draft guidance confirms that mandatory real-time reporting of Income Tax and Class 1A National Insurance contributions for certain benefits in kind will be phased in from 6 April 2027.
Why preparation matters
This is not something employers should leave until the last minute.
Mandatory payrolling will place more pressure on payroll processes, internal communication and record keeping. Employers will need to make sure the right people are sharing the right information at the right time.
Before the rules come in, businesses should consider:
- which benefits they currently provide to employees
- how those benefits are currently recorded and reported
- whether payroll teams receive benefit information quickly enough
- whether payroll software will be ready for the changes
- how employees will be informed about the impact on their pay
The first phase may only apply to selected benefits, but it gives employers a clear warning that benefit reporting is moving towards a more real-time system.
Final thoughts
Mandatory payrolling of benefits is designed to modernise how employee benefits are taxed and reported. In the long term, it may reduce the need for some year-end forms and make the tax position clearer for employees.
However, for employers, it will also bring new responsibilities during the year. Getting benefit values right, updating payroll on time and keeping accurate records will become even more important.
Businesses that prepare early will be in a much stronger position when the new rules come into effect.
If you would like help reviewing your payroll processes or understanding how these changes could affect your business, please get in touch with our team.