Summary: Many employers currently report employee benefits annually using Forms P11D. From April 2027, HMRC will phase in real–time payroll reporting for some benefits, with most remaining benefits payrolled from April 2028, subject to limited exceptions. The changes will affect employers of all sizes that provide taxable benefits and expenses. Although this may sound administrative, it could affect payroll processes, cash flow, employee communications and how benefits are managed across your business.
From April 2027, HMRC will begin mandatory payrolling for certain Benefits in Kind (BiKs), changing how employers report benefits and employees pay tax on them.
Preparing early should make the transition smoother. The changes affect employers of every size, including those with few employees, if they provide taxable benefits or expenses.
This article explains what the changes could mean for your business and why their impact may be wider than expected.
Over the coming weeks, our Employment Tax and Payroll specialists will publish articles and materials on the practical challenges employers may face and the steps they can take now to prepare.
First things first: what are Benefits in Kind?
Benefits in Kind are non-cash benefits and expenses provided to employees in addition to their salary.
Common examples include:
- Private medical insurance
- Company cars
- Fuel benefits
- Staff entertainment
- Staff gifts and vouchers
- Salary sacrifice arrangements that do not meet tax exemption criteria, such as some gym memberships and technology devices
- Personal bills and expenses
- Low-interest employee and director loans
- Living accommodation provided by an employer
Most of these benefits are taxable, creating reporting and tax obligations for employers and employees.
How are benefits reported today?
Currently, employers report benefits in one of three ways:
Option 1 – Payroll benefits voluntarily. Employees pay tax through monthly payroll, and the employer pays Class 1A National Insurance by 22 July following the end of the tax year.
Option 2 – Report benefits to HMRC after the tax year using Forms P11D. Employees typically pay the tax through adjustments to their tax codes. Forms must be submitted by 6 July following the end of the tax year, and the employer pays Class 1A National Insurance by 22 July.
Option 3 – Apply to HMRC for a PAYE Settlement Agreement. Benefits and expenses are reported annually; HMRC prefers reports by 31 July, although this is not a statutory deadline. The employer pays the employee’s tax by 22 October following the end of the tax year. Because this costs more than options 1 and 2, employers often use it for staff entertainment or performance-related non-cash vouchers and gifts.
Option 3 will remain, but the choice between options 1 and 2 is about to change.
What’s changing from April 2027?
From 6 April 2027, HMRC’s proposed first phase of mandatory payrolling will include:
- Private medical insurance
- Company cars
- Car fuel benefits
- Vans
- Van fuel benefits
If you currently report these benefits on Forms P11D, from April 2027 you will report them through payroll as they arise, alongside normal PAYE reporting.
If you already payroll benefits voluntarily, you will continue to do so, but will pay Class 1A National Insurance after each pay period rather than in July 2028.
Under current plans, all other benefits will move to mandatory payrolling from April 2028, with limited exceptions expected to remain reportable on Forms P11D, including:
- Employee loans
- Employer-provided accommodation
We expect an update in the upcoming Autumn Budget, with further HMRC guidance expected before the end of 2026.
Why is HMRC making this change?
The short answer is simplicity.
The current system can confuse employees when tax code adjustments lead to unexpected deductions or bills.
By moving to real-time reporting, HMRC hopes to:
- Make tax collection more accurate
- Reduce reliance on tax code adjustments
- Streamline reporting processes
- Give employees greater visibility over the tax they’re paying
Once systems and processes are ready, many employers should benefit from simpler, more consistent reporting. However, some non-traditional benefits and expenses will remain exceptions and require due diligence to ensure correct taxation and reporting.
Why should businesses start thinking about this now?
April 2027 may seem distant, but many organisations will need time to prepare. For most, this is more than a payroll project.
Example of what will change:
An employee changes their company car in June.
Under the current P11D system, the employer reports the benefit after the end of the tax year.
Under mandatory payrolling, payroll must be told when the change occurs. The old car’s taxable value must be calculated to the change date and the new car’s value reported from June. If payroll receives the information late, adjustments may be needed to tax the correct amount.
Many employers gather benefit information only after the tax year ends. Mandatory payrolling will require them to capture it during the year and share it promptly with payroll, with input from finance, HR and management and other business stakeholders. If you rely on external benefit providers this introduces another data stream which may not be collected in real time.
Although the tax rules may concern some businesses, for many the biggest challenge will be understanding:
- What benefits are provided.
- Where the underlying data sits.
- Who is responsible for maintaining it.
- How changes are communicated to payroll.
- Whether existing processes can support real-time reporting.
Because benefit information will be reported through payroll in real time, errors may be more visible and corrections may require additional payroll adjustments. Employers should ensure their processes are robust before the new rules take effect.
Practical steps to take now
1. Review your current benefits
Create a list of all Benefits in Kind offered across the business.
2. Identify which benefits will be affected
Work out which benefits are likely to fall under the mandatory rules from April 2027 and which may remain outside the regime until the 2nd phase from April 2028.
If you voluntarily payroll benefits, recent HMRC guidance confirms that all benefits will be payrolled from April 2027, rather than April 2028. If you have cross border workers further complexity exists over whether you will need to report benefits or not.
Consider whether you want these benefits to be payrolled, whether to stop offering them or whether to apply for a PAYE Settlement Agreement.
3. Review your processes
Review how benefit information is captured, who owns it and how changes reach payroll. Records held by payroll, HR and finance often differ, so reconcile them before information begins flowing through payroll in real time.
Think how does this reconcile with what we report on our Corporation Tax return and VAT returns. HMRC now utilise data analytics to spot differences across tax returns, mandatory payrolling will likely aid these checks HMRC performs and potentially lead to more enquires being made.
4. Review the cash flow impact
Mandatory payrolling will move most National Insurance liabilities from an annual July payment to monthly payments, affecting cash flow and budgeting.
Update forecasts and budgets now to avoid unexpected pressure when the new rules take effect.
5. Prepare your employees
Employees may notice payslip changes, so communicate early. Under voluntary payrolling, delays in updating tax codes can cause temporary double taxation and reduce monthly income until HMRC refunds the employee. Pending guidance on preventing this during mandatory implementation, employers should warn employees and consider salary advances for anyone facing financial hardship.
6. Reassess your benefits strategy
Use the changes to review whether your benefits package remains fit for purpose and whether employees value or want each benefit.
Don’t leave preparation until the last minute
Businesses that plan now are likely to have a smoother transition and fewer compliance problems.
Our Payroll and Employment Tax teams can assess your arrangements, explain your obligations, identify risks and develop a practical plan for April 2027.
Contact our team today to discuss how your organisation can prepare for mandatory payrolling.
Coming next in our series
In our next article, we will examine the benefits most likely to create real-time reporting challenges, their interaction with salary sacrifice, and the distinction between Class 1 and Class 1A National Insurance contributions: one may involve employee and employer contributions, while the other is employer-only.
This material is for informational purposes only and should not be relied upon as professional advice.
