Mandatory payrolling of benefits – what does this mean for employers?
HMRC has confirmed that the move to mandatory payrolling of Benefits in Kind (BiKs) will now be introduced in two phases, giving employers additional time to prepare.
What is changing?
Currently, most taxable employee benefits are reported to HMRC after the end of the tax year using form P11D, with employers paying Class 1A National Insurance separately.
Under the new system, taxable benefits will be reported and taxed through payroll during the tax year. This means employees will pay the correct Income Tax on their benefits in real time, rather than having their tax code adjusted later.
Phase 1 – From 6 April 2027
The following benefits must be payroll reported:
Company cars
Company car fuel
Vans
Van fuel
Employer-provided medical insurance and medical benefits
Employers will need to ensure their payroll software can process these benefits and that accurate benefit values are available throughout the year.
If we currently process your payroll, our payroll software is ready to support the upcoming changes.
Phase 2 – From 6 April 2028
Most remaining Benefits in Kind will also become subject to mandatory payrolling.
However, beneficial loans and living accommodation benefits will remain outside the mandatory regime and can continue to be reported using P11Ds if employers wish.
What does this mean in practice?
Many employers currently provide benefit information to their payroll team only once a year. Going forward, this information will need to be captured and reported throughout the year.
Employers should begin reviewing:
Which Benefits in Kind they currently provide.
Whether payroll software can support mandatory payrolling.
Internal processes for notifying payroll of new, changed or ceased benefits.
How benefit values are calculated and maintained.
Whether payroll and HR teams require additional training.
Why should employers start preparing now?
Although the first phase does not begin until April 2027, businesses with company cars or private medical insurance may need to update payroll processes, software and internal procedures well in advance.
Employers that leave preparations until the last minute may face:
Incorrect employee tax deductions.
Payroll reporting errors.
Additional HMRC queries and penalties.
Increased administrative burden during implementation.
Something to bear in mind
During the transition to mandatory payrolling, some employees may notice increased tax deductions if HMRC is still collecting tax relating to benefits provided in earlier years while current benefits are being taxed through payroll. This does not necessarily mean the employee is being taxed twice, but employers should be prepared for employee queries regarding tax codes and payroll deductions.
How we can help
We can help you review your current Benefits in Kind arrangements, assess the impact of mandatory payrolling and ensure your payroll processes are ready for the changes ahead.
Further HMRC guidance is expected during 2026, and we will keep clients informed as more details become available.