Mandatory payrolling of benefits in kind, preparing for April 2027 and April 2028
Overview
HMRC is introducing mandatory payrolling of taxable benefits in kind in two phases. Under the published timetable, company cars, car fuel, vans, van fuel and employer-provided medical benefits move into mandatory payrolling from 6th April 2027. Most other taxable benefits follow from 6th April 2028.
Employment-related loans and employer-provided living accommodation remain outside mandatory payrolling under this timetable, although voluntary payrolling will be available from April 2027.
For benefits covered by the new system, employers will report taxable values through payroll and collect employees’ Income Tax during the year. Associated employer Class 1A National Insurance contributions will also be reported and paid in real time. P11D and P11D(b) reporting will still be needed in relevant cases, so these forms are not disappearing completely in April 2027.
The information below reflects HMRC’s published timetable and interim guidance available on 14th October 2026. Employers should check final guidance and software requirements before implementation.
Detailed content
1. What is changing?
Benefits in kind are non-cash benefits provided to employees or directors, such as a company car available for private use or private medical insurance. Not every benefit is taxable, and exemptions must still be considered.
Under the current system, employers generally report non-payrolled taxable benefits after the tax year using P11D forms. Existing voluntary payrolling collects Income Tax through payroll, but the employer still reports Class 1A National Insurance annually on form P11D(b).
The new arrangements bring reporting and collection into the payroll cycle for covered benefits. They change administration and payment timing, rather than automatically creating a new tax liability on previously exempt benefits.
2. Which benefits are included, and when?
Phase 1, from 6th April 2027:
Company cars.
Car fuel benefits.
Vans.
Van fuel benefits.
Employer-provided medical benefits, including taxable private medical insurance.
Phase 2, from 6th April 2028:
Most other taxable benefits in kind.
Employment-related loans and living accommodation remain voluntary rather than mandatory under the published timetable.
Employers should map each benefit to the relevant phase. Benefits not yet mandatory must continue to be reported through the appropriate existing route unless validly enrolled for voluntary payrolling.
HMRC also provides an option to exclude globally mobile employees from mandatory payrolling, with a new service scheduled for November 2026. Employers using this option should follow the eligibility and notification rules and continue the relevant P11D and P11D(b) arrangements.
3. How will payroll reporting work?
Employers will calculate the taxable benefit using the rules for that benefit and report the relevant value through the Full Payment Submission, alongside normal payroll information, at each payroll date.
The taxable value is used to calculate PAYE Income Tax. It is not normally extra cash paid to the employee. The employer must also calculate and report the associated Class 1A National Insurance, where applicable.
Benefits with annual values may require allocation across pay periods, estimates and later adjustments. Changes in cars, insurance cover, availability periods and employee contributions must be processed using HMRC’s benefit-specific rules.
Where cash pay is too low to collect all the tax, special rules apply, including the PAYE 50% overriding limit. Employers should follow HMRC’s carry-forward and reconciliation procedures rather than making excessive deductions or treating the liability as waived.
4. Registration and software readiness
Employers do not need to register to payroll the benefits that become mandatory in April 2027.
For non-mandatory benefits, HMRC plans to reopen voluntary registration in November 2026, with registration required by 5th April 2027 for the 2027/28 tax year. This includes employment-related loans and accommodation. Under the published guidance, benefits voluntarily payrolled from April 2027 must also have their associated Class 1A National Insurance payrolled in real time.
Confirm the service is available and complete any required registration before relying on this route. Registration for voluntary payrolling in 2026/27 has already closed.
Ask your payroll provider to confirm support for the relevant benefit types, new reporting fields, Class 1A calculations, corrections and employee statements. Test the actual software configuration, not just a general assurance that the product supports payroll.
5. Employee communications and employer cash flow
Explain that employees will pay tax on covered benefits during the year they receive them. HMRC plans to remove relevant benefit estimates from tax codes as payrolling starts, but tax-code deductions collecting earlier-year underpayments may remain.
An employee can therefore pay current-year benefit tax through payroll while also settling an earlier-year underpayment. This is not necessarily double taxation of the same benefit, but it can reduce take-home pay during transition. Tax-code errors or hardship should be raised promptly with HMRC.
Employers should also budget for Class 1A cash flow. During 2027 they may pay the annual liability for 2026/27 while also paying in-year Class 1A on benefits provided from April 2027.
6. Annual reporting and records still matter
Complete any outstanding 2026/27 P11D and P11D(b) obligations under the current rules. Benefits remaining outside payrolling can still require these forms in later years.
HMRC’s published approach also requires an employee statement by 1st June following the tax year, identifying relevant benefits, which were payrolled and their values. Recheck the final requirements before the first year-end under the new system.
Keep benefit agreements, valuation workings, invoices, employee contributions, payroll submissions, corrections and communications. Reconcile payroll values to benefit-provider information and accounting records throughout the year.
7. Errors, penalties and transitional support
HMRC’s interim guidance provides first-year protection from inaccuracy penalties for errors relating to mandatory payrolling in 2027/28, unless there is evidence of deliberate non-compliance.
This is not a general penalty holiday. Late filing and late payment penalties can still apply, as can statutory late payment interest. Existing P11D and P11D(b) penalties remain relevant where those returns are required.
Correct errors promptly and check the final transitional rules before relying on any relief.
Step-by-step procedure
Nominate an owner. Obtain current HMRC guidance and create separate preparation plans for April 2027 and April 2028.
Build a benefit register. Record each employee or director, benefit type, reporting route, relevant dates and valuation inputs.
Confirm registration needs. Mandatory phase 1 benefits need no registration; consider voluntary registration for other benefits and any globally mobile employee exclusion.
Confirm software capability. Check calculations, reporting, Class 1A, corrections and employee information with your provider and accountant.
Test realistic cases. Include joiners, leavers, benefit changes, low cash pay, salary sacrifice and changing insurance costs where relevant.
Prepare cash-flow and communication plans. Explain tax-code transition to employees and budget for overlapping Class 1A payment obligations.
Implement the relevant phase. Monitor the first payrolls, reconcile regularly, retain evidence and complete remaining annual reporting and employee statements.
Frequently asked questions
Are P11D forms disappearing in April 2027?
No. They will not generally be needed for benefits fully reported through the new payroll process, but they remain relevant for non-payrolled benefits and excluded cases. The 2026/27 year-end obligations also continue.
When does mandatory payrolling start?
Phase 1 starts on 6th April 2027 for vehicle and medical benefits listed above. Most other taxable benefits follow on 6th April 2028.
Are loans and accommodation included?
They remain outside mandatory payrolling under the published timetable. Voluntary payrolling will be available from April 2027, subject to registration and the detailed rules.
Will employees automatically pay more tax?
The reform principally changes how and when tax is collected. Actual deductions depend on the benefit value, tax code and individual circumstances. Earlier-year underpayments may continue alongside current-year deductions.
What happens to Class 1A National Insurance?
For benefits covered by the new payrolling arrangements, the employer reports and pays Class 1A during the year. It is an employer liability, not an employee deduction. Check the final payment and reconciliation mechanics before implementation.
Do we need to register?
Not for benefits becoming mandatory in April 2027. Voluntary payrolling of other benefits requires registration under the new service and its deadlines.
What if our software is not ready?
Contact the provider and accountant now to agree a compliant solution. Do not assume P11D-only reporting can replace mandatory payrolling after the relevant start date.
How can 360 Accounts help?
360 Accounts & Bookkeeping can help review your benefit register, coordinate payroll preparation and explain the reporting changes. Specialist or unusual benefits should be reviewed individually before treatment is confirmed.