HMRC confirmed phased approach to mandatory payrolling of benefits in kind

HMRC has confirmed a phased approach to the mandatory payrolling of benefits in kind, giving UK employers more time to prepare for one of the biggest changes to employee benefits reporting in recent years.

Benefits will be reported and taxed in real-time, rather than via the annual P11D process many are used to. For employers, this means reviewing payroll systems, benefit data, internal processes and employee communications well in advance of the first mandatory phase.

What has changed?

Mandatory payrolling was originally expected to apply more widely from April 2026, before being deferred to April 2027. However, HMRC has now announced that the change will be introduced in two separate phases rather than all at once.

From 6 April 2027, mandatory payrolling is expected to apply to company cars, car fuel, vans, van fuel, private medical insurance and other employer-provided medical benefits, which are understood to represent the majority of benefits provided by UK employers. From April 2028, mandatory payrolling is then expected to be extended to most remaining benefits in kind.

Employment-related loans and employer-provided living accommodation remain outside the mandatory regime for now, with further details still to be confirmed.

How will the new system work?

Under the new regime, employers will need to report the taxable value of affected benefits through payroll using Real Time Information. This means including the appropriate taxable value within the Full Payment Submission, rather than reporting the benefit after the end of the tax year.

Employees will pay income tax on the benefit during the tax year, rather than through later adjustments to their PAYE code. Employers will also need to prepare for Class 1A National Insurance reporting and payment to move closer to real time for payrolled benefits.

Although this should make benefit taxation clearer for employees in the long term, it will require employers to have accurate, timely benefit data available before each payroll run.

Will P11Ds disappear?

Not immediately. P11Ds are expected to remain relevant during the transition period and for benefits that are not yet within mandatory payrolling. Employers may still need to use P11Ds for excluded or non-mandated benefits, particularly while the phased implementation is underway.

This emphasises the importance of understanding which benefits you provide, which phase those fall into, and whether any separate reporting obligations will continue to apply.

Why employers should start preparing now

Although the first mandatory phase is not due until April 2027, preparation should not be left until the last minute. Payrolling benefits in kind is not simply a payroll software change; it affects HR, finance, benefits providers, payroll teams and employee communications.

The main challenge for many employers will be data quality, with any errors potentially affecting employees’ tax deductions and creating more work for payroll teams.

There may also be practical issues where benefits change part way through the year, where employees join or leave, or where information is held by third-party providers rather than directly by the employer.

Benefits that were previously reviewed annually will need to be monitored and updated much more regularly, whilst transparency around processes and responsibilities will be essential.

What should employers next steps be?

Employers need to start building a clear picture of the benefits they provide and how that information flows into payroll.

The phasing of mandation affords more time but also creates a ‘transition’ period where different benefits may need to be handled differently.

The following steps are a great starting point for preparations ahead of April 2027:

• Review benefits currently provided to employees and identify which will fall into the first mandatory phase.
• Check whether payroll software and internal systems can capture and report benefit values accurately through payroll.
• Speak to benefit providers to confirm how quickly they can provide changes, updates and annual renewal information.
• Assess the impact on cash flow, particularly where Class 1A National Insurance may be reported and paid closer to real time.
• Plan employee communications so staff understand how the changes may affect payslips, tax codes and take-home pay.
• Consider whether voluntary payrolling of some benefits before the mandatory date would help test systems and processes.
• Speak to your payroll provider to understand how they can help you transition to mandatory payrolling of benefits in kind, and for guidance as to what additional data or system changes are required.

Mandatory payrolling of benefits in kind represents a significant change for employers, but early preparation will help make the transition smoother and reduce the risk of errors once the new rules take effect. By reviewing your benefits, systems and processes now, you can ensure your payroll reporting remains accurate, compliant and clear for employees.

If you need support preparing for mandatory payrolling of benefits in kind, our team can help you understand the changes, review your current arrangements and identify the practical steps needed before April 2027. Please get in touch to discuss how these changes may affect your business.