HMRC has announced that mandatory payrolling of benefits in kind will now take effect from 6 April 2027, rather than the originally planned 6 April 2026. This represents a significant shift in how employers report and tax employee benefits.
This decision follows feedback from external stakeholders and aims to provide employers, payroll professionals, software providers and tax agents with additional time to prepare.
This comprehensive guide explains everything you need to know about these mandatory changes.
Key Takeaways:
- Mandatory payrolling begins 6 April 2027
- Most benefits must be reported through FPS
- P11D forms largely eliminated
- Class 1A NIC paid throughout the year
- First-year penalties waived except for deliberate non-compliance
- Loans and accommodation can be payrolled voluntarily
What are Benefits in Kind?
Benefits in kind (BiKs) are non-cash perks provided to employees that have monetary value. They are not part of regular salary but still count as taxable income.
Common examples include company cars, private healthcare, accommodation, interest-free loans, and mobile phones.
Common Taxable Benefits
| Benefit Type | Description | Tax Treatment |
|---|---|---|
| Company Cars | Vehicles for personal use | Based on list price and CO2 emissions |
| Private Medical Insurance | Health cover paid by employer | Taxed on insurance premium value |
| Accommodation | Housing provided by employer | Based on annual rental value |
| Interest-Free Loans | Loans with no or low interest | Taxed on interest benefit |
| Gym Memberships | Fitness club access | Taxed on membership cost |
| Car Fuel | Private fuel for company cars | Fixed fuel benefit charge applies |
What is Payrolling Benefits in Kind?
Payrolling benefits in kind lets UK employers tax employee perks through payroll instead of submitting a P11D form, with the benefit value added to monthly pay and Income Tax deducted in real time.
Currently, this system is voluntary. However, from April 2027, it becomes mandatory for most benefits.
How it works?
The employer calculates the annual value of each benefit. This amount is divided by the number of pay periods in the year. Each instalment is then taxed as earnings through PAYE.
For example, if medical insurance costs £600 annually and you pay monthly, £50 is added to taxable pay each month.
Timeline of Key Changes
These updates set out how the move to mandatory payrolling will roll out over the next two years. Each stage outlines what employers need to prepare for, from optional participation to full real-time reporting. The aim is to help employers plan their payroll processes without disruption.
Current Position (Until 5 April 2026)
Employers can voluntarily payroll most benefits. Registration is required before the tax year begins. P11D forms remain available for non-payrolled benefits.
Transition Period (6 April 2026 to 5 April 2027)
The voluntary registration service will close after 5 April 2026 in preparation for mandatory payrolling.
Employers can continue voluntary payrolling if already registered. No new voluntary registrations accepted after 5 April 2026.
Mandatory Implementation (From 6 April 2027)
From April 2027, taxable benefits will be reported to HMRC and Class 1A NIC will be paid in real time via payroll through the full payment submission (FPS).
Employers will not need to register for payrolling from April 2027, except for loans and accommodation benefits.
Timeline Summary Table
| Date | Action Required |
|---|---|
| Before 5 April 2026 | Last chance to register for voluntary payrolling |
| 5 April 2026 | Voluntary registration service closes |
| November 2026 | Registration opens for loans and accommodation |
| 6 April 2027 | Mandatory payrolling begins for most benefits |
Which Benefits Must Be Payrolled?
From April 2027, most taxable benefits will move under payrolling rules to simplify reporting and reduce the need for P11Ds. Employers will need to ensure their payroll systems can handle these updates smoothly.
The list below shows which benefits fall under the new requirements and where exceptions still apply.
Exceptions: Loans and Accommodation
Benefits relating to employee loans or accommodation could not previously be included in voluntary payrolling, but this will change from April 2027.
The registration service for voluntary payrolling of loans and accommodation is expected to open from November 2026.
These benefits can be payrolled voluntarily from April 2027. A later mandatory date will be set by HMRC.
How to Calculate Payrolled Benefits?
Payrolling works by spreading the taxable value of a benefit across the year so tax is collected in real time. The process stays consistent with existing P11D rules, which makes the transition easier for employers.
The steps below outline how the calculation works in practice.
Basic Calculation Method
The calculation follows the same rules as P11D reporting:
- Work out the annual cash equivalent of the benefit
- Divide by the number of pay periods per year
- Add to employee’s taxable pay each period
- Deduct Income Tax through PAYE
Example Calculation
Scenario: Employee receives private medical insurance worth £1,200 annually. Company pays monthly.
Calculation:
- Annual benefit value: £1,200
- Number of pay periods: 12
- Monthly taxable amount: £1,200 ÷ 12 = £100
- Tax deducted monthly: £100 × employee’s tax rate
| Tax Band | Monthly Tax on £100 Benefit |
|---|---|
| Basic Rate (20%) | £20 |
| Higher Rate (40%) | £40 |
| Additional Rate (45%) | £45 |
Mid-Year Changes
Where cash equivalent changes mid-tax year, the revised taxable amount must be calculated and payrolled for the remaining pay periods that tax year.
If benefit value increases or decreases, recalculate the remaining payments. No retrospective adjustment is needed for earlier periods.
Reporting Requirements
The move to mandatory payrolling changes how employers submit benefit information to HMRC, shifting most reporting into real-time. This reduces reliance on year-end forms and helps employees see accurate tax deductions each pay period.
The sections below outline what needs to be reported and when.
Real-Time Information (RTI)
The taxable value of BiKs and expenses will be reported via the full payment submission (FPS), allowing tax and Class 1A National Insurance contributions to be reported in real time.
FPS fields need to be increased to match what’s reported on P11D and P11D(b) forms; it’s currently estimated that over 100 new fields will be required.
Annual Statements
Employers must still provide annual benefit statements to employees. These show the total benefits provided during the tax year. The deadline is 1 June following the tax year end.
Class 1A National Insurance
From April 2027, Class 1A NIC will be paid via payroll throughout the year, and no form P11D(b) will be required unless it relates to non-payrolled employee loan or accommodation benefits. The current Class 1A rate is 15% for the 2025/26 tax year.
Impact on Employees
Mandatory payrolling changes how employees experience benefit taxation, making deductions more predictable and easier to understand. It removes the wait for tax code corrections and brings more transparency to monthly pay. The points below show what employees can expect as the new system rolls out.
Tax Code Adjustments
HMRC will automatically remove benefits from employees’ tax codes ahead of mandatory payrolling in April 2027. This prevents double taxation when payrolling begins.
Monthly Tax Collection
Instead of paying tax retrospectively through code adjustments, employees pay tax on benefits monthly. This spreads the cost throughout the year.
Employee Communication
Employers must inform employees about:
- Which benefits are being payrolled
- How it affects their take-home pay
- Changes to their tax code
- What the monthly benefit value represents
Impact on Employers
Mandatory payrolling shifts most employer responsibilities into the live payroll cycle, which means processes need to be accurate and well-coordinated. While this reduces year-end pressure, it increases the need for reliable systems and real-time data handling.
The points below outline the main advantages and challenges businesses should be aware of.
Advantages of Payrolling Benefits
Reduced Administration
Forms P11D and P11D(b) will no longer be required for payrolled benefits.
This eliminates end-of-year P11D preparation for most benefits.
Improved Cash Flow
Tax is collected in real time rather than as lump sums. Class 1A NIC is spread throughout the year.
Better Accuracy
Real-time reporting reduces year-end corrections. Employees pay correct tax during the year.
Challenges to Consider
System Requirements
Payroll software must handle additional FPS fields. Updates and testing are required before April 2027.
Data Management
Benefit information must be available for each pay period. Multiple departments may need to coordinate.
Accuracy Requirements
Where value isn’t known at start of the tax year, a reasonable estimate of the taxable value must be made. Zero values shouldn’t be used where the benefit will be material.
Penalties and Compliance
The shift to mandatory payrolling brings updated expectations for accurate and timely reporting. HMRC plans a softer approach in the first year to help employers adjust, but full compliance rules will follow soon after.
The summary below explains how penalties will apply during and after the transition.
First-Year Leniency
To support smooth introduction, customers who make errors related to mandatory payrolling in 2027 to 2028 returns will not be charged penalties for inaccuracies unless there is evidence of deliberate non-compliance. Existing late filing and late payment penalties still apply.
Ongoing Penalties (From 2028-29)
From the 2028-29 tax year onwards, full penalties will apply. These include:
- Penalties for inaccurate returns
- Interest on late-paid tax and Class 1A NICs
- Late filing penalties for RTI returns
Preparing for April 2027
Preparing early helps employers avoid last-minute pressure when mandatory payrolling begins. The timeline below sets out what to do now and what to focus on during the transition year. These steps help build a reliable system that supports accurate reporting from day one.
Immediate Actions (Before 5 April 2026)
Review Current Benefits
List all benefits provided to employees. Identify which benefits need payrolling.
Assess Voluntary Payrolling
Consider registering before 5 April 2026 to gain experience. This provides a trial run before mandatory implementation.
Check Software Capability
Contact your payroll software provider. Confirm they will support expanded FPS fields.
Actions for 2026-27 Tax Year
Update Systems
Install software updates as providers release them. Test benefit calculations thoroughly.
Train Staff
Ensure payroll team understands new requirements. Coordinate with HR and finance departments.
Establish Data Flows
Create processes to capture benefit information monthly. Set up communication channels between departments.
Preparation Checklist
| Action | When | Status |
|---|---|---|
| Review all employee benefits | Before April 2026 | ☐ |
| Assess software requirements | Before April 2026 | ☐ |
| Consider voluntary registration | Before 5 April 2026 | ☐ |
| Attend HMRC webinars | Throughout 2025-26 | ☐ |
| Update payroll software | Summer 2026 | ☐ |
| Train payroll staff | Autumn 2026 | ☐ |
| Test benefit calculations | Winter 2026-27 | ☐ |
| Communicate with employees | March 2027 | ☐ |
PAYE Settlement Agreements (PSAs)
Some employers report and pay tax and NIC on employee benefits under a PAYE Settlement Agreement, where the employer pays income tax on behalf of employees and Class 1B NIC on the total value.
PSAs remain available alongside payrolling. Benefits covered by PSAs do not need to be payrolled. These are useful for minor, irregular, or impracticable benefits.
Special Considerations
Some situations require extra attention to make sure benefit taxation stays accurate throughout the year. These points help employers manage changes such as new starters, leavers, and employees with multiple benefits. They also clarify how salary sacrifice rules continue to apply.
New Employees
When hiring new staff, inform them about payrolled benefits. Explain how benefits affect their taxable pay. Ensure their tax code is correct from the start.
Leavers During the Year
If employees leave mid-year, calculate any outstanding benefit tax. This may need to be collected from final pay.
You cannot deduct more than 50% of final pay for benefit tax. Uncollected amounts will be collected through P800 or Self Assessment.
Multiple Benefits
Employees receiving several benefits have all amounts added together. The total is spread across pay periods.
Example: Company car (£3,600) + medical insurance (£1,200) = £4,800 annually. Monthly addition to taxable pay = £400.
Optional Remuneration Arrangements
Salary sacrifice schemes still follow OpRA rules. The taxable amount is usually the higher of cash foregone or benefit value.
This applies regardless of payrolling.
HMRC Support and Guidance
As employers prepare for the shift to mandatory payrolling, HMRC is offering a range of resources to help with planning and implementation.
These tools make it easier to understand the rules, test calculations, and stay updated as requirements evolve.
Resources Available
HMRC is providing extensive support materials:
- Technical notes and detailed guidance
- Online calculators for benefit values
- Webinars and training sessions
- Updates to Basic PAYE Tools
Draft Legislation
Further updates and draft legislation will be published in 2025 for technical comments. Stakeholders can provide feedback to help shape final requirements.
Contact for Queries
For questions about mandatory payrolling, email: [email protected] Note: HMRC cannot respond to individual emails but will use feedback for future guidance updates.
Conclusion
The mandatory payrolling of benefits in kind from April 2027 represents significant change for UK employers. While the transition requires careful planning, it ultimately simplifies benefit administration.
The delay to April 2027 provides crucial time for businesses to properly understand new requirements and adapt processes accordingly. Start preparing now to ensure smooth transition. Review your current benefits, assess software needs, and consider voluntary payrolling to gain experience.
The next 18 months offer valuable opportunity to test systems and train staff before mandatory implementation.
Frequently Asked Questions
When does mandatory payrolling begin?
Mandatory payrolling of benefits in kind begins on 6 April 2027. This was delayed from the original date of 6 April 2026 to allow more preparation time.
Do I need to register for mandatory payrolling?
No registration is needed for most benefits from April 2027. HMRC will automatically remove benefits from tax codes. Registration is only required for loans and accommodation if you choose to payroll them voluntarily.
What happens to P11D forms?
P11D forms are largely eliminated from April 2027. They remain available only for non-payrolled loans and accommodation benefits. The P11D(b) form is also no longer needed except for those specific benefits.
Can I still use voluntary payrolling before 2027?
Yes, voluntary payrolling continues until 5 April 2026. You must register before this date to voluntary payroll for 2026-27. No new voluntary registrations are accepted after 5 April 2026.
What if I don’t know the exact benefit value?
Where value isn’t known at start of the tax year, a reasonable estimate must be made. You can adjust the value in later pay periods if it changes. Zero values should not be used if you know the benefit will be material.
How do I payroll company cars?
Company car benefits follow the same calculation as P11D reporting. Use HMRC’s online calculator to determine the taxable benefit based on list price, CO2 emissions, and fuel type. Divide the annual amount by pay periods.
What about Class 1A National Insurance?
Class 1A NIC will be paid via payroll throughout the year from April 2027. The current rate is 15%. This is reported through FPS alongside Income Tax.
Will employees pay more tax?
No, the total tax remains the same. Payrolling simply spreads payments throughout the year instead of collecting retrospectively. This often improves employee cash flow.
What if my payroll software isn’t ready?
Contact your software provider immediately. Most providers are working on updates. You may need to switch providers if your current one cannot support the new requirements.
Can I exclude some employees from payrolling?
Under the voluntary system (until April 2026), you can exclude specific employees. From April 2027, mandatory payrolling applies to all employees receiving benefits. No exclusions are permitted.
What happens if I make a mistake in 2027-28?
HMRC will not charge penalties for inaccuracies in 2027-28 returns unless there is deliberate non-compliance. Late filing and payment penalties still apply. From 2028-29 onwards, full penalty regime applies.
Do loans and accommodation need to be payrolled?
Not initially. These benefits can be payrolled voluntarily from April 2027. A separate registration process opens in November 2026. HMRC will set a mandatory date for these benefits later.
How do I communicate changes to employees?
Inform employees in writing before April 2027. Explain how payrolling affects their pay, what the benefit values represent, and how their tax code changes. Provide examples showing monthly impact.
What if an employee receives a benefit mid-year?
Where employers haven’t been notified that an employee received a BiK in timely fashion, it can be reported as soon as possible in remaining pay periods that tax year. No prior adjustment is required.
Will PAYE Settlement Agreements continue?
Yes, PSAs remain available. Benefits covered by PSAs do not need to be payrolled. This is useful for minor, irregular, or impracticable benefits.
