Major changes to the way employers report and tax employee benefits are approaching. From April 2027, many benefits in kind will need to be processed through payroll rather than dealt with solely through the traditional year-end P11D system.

If your business provides company cars, private medical insurance or other taxable benefits to employees, you need to prepare for significant changes.

HMRC is introducing mandatory payrolling of benefits in kind in stages, beginning on 6 April 2027.

The changes will affect how employers calculate, report and account for Income Tax and employer National Insurance on certain benefits.

For businesses currently relying on annual P11D reporting, the transition could require changes to payroll software, internal record-keeping and employee communications.

What are benefits in kind?

Benefits in kind are non-cash benefits provided to employees or directors as part of their remuneration.

Common examples include:

• Company cars.
• Private medical insurance.
• Employer-provided vans available for private use.
• Fuel provided for private journeys.
• Interest-free or low-interest employee loans.
• Living accommodation.
• Certain other non-cash benefits.

Depending on the benefit and the employee’s circumstances, a taxable benefit may arise.

Historically, many benefits have been reported after the tax year ends using form P11D.

The employee’s resulting tax liability may then be collected through their tax code or Self Assessment.

That system is now changing.

What’s happening from 6 April 2027?

HMRC is introducing mandatory payrolling in phases.

For the 2027/28 tax year, mandatory payrolling will apply to five categories:

1. Company cars

Where an employee receives a taxable company car benefit, the employer will need to account for the taxable value through payroll.

2. Car fuel

Taxable employer-provided private fuel benefits will also fall within the mandatory arrangements.

3. Vans

Taxable company van benefits will be included.

4. Van fuel

Taxable private fuel benefits associated with company vans will also be covered.

5. Medical benefits

Taxable employer-provided medical benefits, including relevant private medical insurance, will form part of the first phase.

This means employers will need systems capable of calculating and reporting the taxable values during the tax year.

Why is HMRC making these changes?

The current system can create a delay between an employee receiving a benefit and paying the associated Income Tax.

For example, an employee might receive a new company car in June 2026.

The employer would normally report the taxable benefit through the appropriate annual procedures, with the tax subsequently collected through the employee’s tax code or other arrangements.

Mandatory payrolling aims to bring the tax treatment closer to the period in which the benefit is actually received.

This should make the tax position more transparent and reduce the reliance on year-end reporting.

However, it also places greater responsibility on employers to ensure accurate information is available throughout the year.

How will payrolling benefits work?

Rather than reporting the taxable value only after the tax year ends, employers will generally calculate the benefit and include the relevant amount in payroll reporting.

The benefit value is used to calculate Income Tax.

This does not mean the employee receives the benefit’s value as additional cash salary.

Instead, the taxable amount is taken into account when calculating deductions.

Employers will also need to deal with the associated Class 1A National Insurance contributions in accordance with the new reporting and payment requirements.

Example: An employee receiving private medical insurance

Imagine your business provides an employee with private medical insurance costing £1,200 annually.

Assume the full cost represents a taxable benefit.

Under the payrolling approach, the annual taxable value could be spread across the year.

For a monthly payroll, this would represent £100 of taxable benefit each month.

The appropriate Income Tax would then be calculated through payroll.

For an employee taxed at 20%, the illustrative additional Income Tax would be £20 per month, assuming the entire benefit falls within that tax band.

The employee would not receive an additional £100 in salary. The £100 is the taxable value of the non-cash benefit.

The actual payroll treatment must follow HMRC’s detailed rules and the employee’s circumstances.

What about benefits that aren’t mandatory in 2027/28?

Employers can choose to payroll other taxable benefits voluntarily.

Examples may include certain employment-related loans, living accommodation and other benefits outside the first mandatory phase.

However, voluntary payrolling requires registration with HMRC.

HMRC has announced that a new registration service will become available in November 2026.

Employers wishing to voluntarily payroll additional benefits in 2027/28 will need to ensure they meet the relevant registration requirements.

The deadline for registering relevant benefits is before the start of the 2027/28 tax year.

An important update: Employer National Insurance

HMRC’s October 2026 Employer Bulletin has clarified an important point for businesses considering voluntary payrolling.

From 6 April 2027, where an employer voluntarily payrolls a benefit in kind, any associated Class 1A National Insurance contributions must also be reported and paid through payroll in real time.

Employers will not be able to payroll the Income Tax on those voluntarily included benefits while choosing to report the associated Class 1A contributions separately after the year end.

This has implications for payroll processes and potentially the timing of employer cash outflows.

Businesses should therefore consider the Income Tax and National Insurance reporting requirements together.

What happens in April 2028?

The second phase of mandatory payrolling is scheduled to begin on 6 April 2028.

From that date, most remaining taxable benefits will become subject to mandatory payrolling.

However, taxable beneficial employment-related loans and living accommodation benefits are expected to remain outside the mandatory requirement.

Employers will be able to choose to payroll those benefits voluntarily, subject to registration.

The phased introduction is designed to give employers and payroll software providers time to prepare.

Will P11D forms disappear?

Not immediately.

P11D reporting will remain relevant during the transition.

For 2027/28, benefits not included in mandatory payrolling and not registered for voluntary payrolling will generally continue to be reported using the relevant year-end procedures.

Employers should not assume that the introduction of mandatory payrolling removes every existing reporting obligation.

The position will depend on which benefits are provided and which tax year is involved.

What should employers be doing now?

Although April 2027 may seem some distance away, preparation should begin well before the new tax year.

We recommend the following steps.

1. Review all employee benefits

Identify every taxable benefit currently provided to employees and directors.

2. Check your payroll software

Confirm that your payroll system will support HMRC’s mandatory benefit reporting requirements.

3. Review your benefit records

Make sure accurate information is available for company cars, fuel benefits, medical insurance and other relevant benefits.

4. Consider voluntary payrolling

Decide whether voluntarily payrolling additional benefits from April 2027 would simplify administration.

5. Review employer National Insurance

Understand how the change may affect the timing of Class 1A National Insurance reporting and payments.

6. Communicate with employees

Explain that their tax deductions may change as benefits begin to be taxed through payroll.

Could employees appear to be taxed twice?

One concern is that employees may find themselves paying tax on current-year benefits through payroll while HMRC is also collecting tax relating to benefits received in an earlier year.

This could temporarily increase deductions.

However, it does not necessarily mean the same benefit is being taxed twice.

Instead, the employee may be paying tax relating to two different tax years at the same time.

Employers should explain this carefully to avoid unnecessary confusion.

Where employees experience financial hardship, HMRC may be able to discuss appropriate payment arrangements.

Payroll accuracy will become even more important

The changes create a closer link between employee benefits, payroll reporting and financial accounting.

Businesses will need to ensure that information from HR, payroll, finance and benefit providers is coordinated.

For example, if an employee changes company cars during a tax year, payroll records may need to be updated promptly.

Similarly, changes to private medical insurance arrangements could affect the value of the taxable benefit.

Delays or inaccuracies could lead to incorrect deductions and additional work correcting payroll submissions.

How williams lester accountants can help

At williams lester accountants, our payroll and tax services are designed to help employers stay compliant without allowing administration to become a distraction.

We can help you prepare for the mandatory payrolling changes, review your existing benefits and identify potential reporting issues.

Our support can include:

• Reviewing employee and director benefits.
• Assessing current P11D reporting arrangements.
• Planning the transition to mandatory payrolling.
• Advising on voluntary payrolling options.
• Reviewing Class 1A National Insurance obligations.
• Supporting payroll software and reporting processes.
• Helping businesses communicate changes to employees.

We believe a well-managed payroll system should provide confidence, save administrative time and support a more efficient business.

Is your business ready for April 2027?

If your company provides company cars, medical insurance or other taxable employee benefits, now is the time to start preparing.

Don’t leave the transition until the first payroll run of the new tax year.

Speak to williams lester accountants about reviewing your current arrangements and preparing for the changes.

This article reflects HMRC announcements and guidance available in October 2026. Detailed implementation requirements may be updated before the mandatory payrolling rules take effect in April 2027.