Mandatory Payrolling of Benefits in Kind: What Employers Need to Prepare For
The way employers report benefits in kind is changing.
Rather than waiting until after the tax year to report many employee benefits on forms P11D, employers will increasingly be required to process the taxable value of those benefits through payroll.
Mandatory payrolling is expected to be introduced in phases from 6 April 2027.
What is payrolling a benefit?
When a benefit is payrolled, its taxable value is added to the employee’s pay for PAYE purposes.
The employee does not receive the value in cash. Instead, the benefit is treated as additional taxable earnings so that the income tax due is collected through payroll throughout the year.
For example, suppose an employee receives private medical insurance with an annual taxable value of £600.
For a monthly paid employee, £50 would be added to their taxable pay each month. PAYE would then be calculated on their salary plus the £50 benefit value.
Which benefits enter phase one?
According to the supplied article, mandatory payrolling is due to begin on 6 April 2027 for:
- company cars;
- company car fuel;
- company vans;
- van fuel; and
- medical benefits.
Employers will therefore need to ensure that their payroll systems contain accurate information about these benefits before the first payroll of the 2027/28 tax year.
What happens in phase two?
From 6 April 2028, mandatory payrolling is expected to extend to most remaining benefits in kind.
The supplied article identifies taxable cheap loans and living accommodation as exceptions at that stage. Employers may be able to payroll these voluntarily where the necessary registration has been made.
These benefits are expected to become mandatory at a later date.
What happens to the P11D?
Where a benefit has been payrolled correctly, it is not normally reported again on the employee’s P11D.
As mandatory payrolling expands, the P11D will become relevant to fewer benefits.
However, employers should not assume that all year-end reporting will disappear immediately. During the transition, businesses may have some benefits dealt with through payroll and others reported after the end of the tax year.
Careful reconciliation will be essential to avoid benefits being omitted or reported twice.
Class 1A National Insurance will affect cash flow
Historically, Class 1A National Insurance on most benefits has been calculated after the tax year and paid as a single annual liability.
The supplied article states that under mandatory payrolling, the associated Class 1A National Insurance is expected to be reported through Real Time Information and paid alongside the employer’s monthly PAYE liabilities.
This would bring the payment forward.
For employers providing significant benefits, particularly company vehicles or private medical insurance, the cash-flow impact could be noticeable.
Instead of setting money aside for one annual payment, businesses may need to fund the liability throughout the year.
What employers should do now
Although the first phase is not due to begin until April 2027, preparation should begin well before then.
Businesses should review:
- which employees receive taxable benefits;
- the annual taxable value of each benefit;
- how changes during the year are communicated to payroll;
- whether payroll software will support the new reporting requirements;
- responsibility for checking benefit information;
- how leavers and new starters will be managed; and
- the effect of monthly Class 1A National Insurance payments on cash flow.
A good process will require cooperation between payroll, finance, HR and whoever arranges employee benefits.
Why early preparation matters
Payrolling a benefit is not simply a matter of adding an annual figure to the payroll system.
Values can change when employees join or leave schemes, change vehicles, repay private fuel or receive a benefit for only part of the year. Those changes need to reach payroll promptly.
At williams lester accountants, we can help employers identify the benefits affected, review payroll processes and prepare for the cash-flow consequences of mandatory payrolling.