Payrolling Benefits in Kind: What is Changing?

The government has confirmed that all employers will be required to payroll benefits in kind from April 2027, having delayed its implementation by a year. This delay offers welcome breathing space for employers, payroll providers and advisers, who now have additional time to adapt systems, review processes and prepare employees for the shift to mandatory payrolling. HMRC has also outlined a phased programme of activity leading up to 2027, giving organisations a clearer path to follow.

What Does This Mean for Employers?

From April 2027, HMRC’s current guidance indicates that P11Ds will only be permitted for benefits relating to employment-related loans and accommodation. These two areas will continue under a voluntary payrolling arrangement for the time being, and businesses will need HMRC approval to payroll them by 5 April 2027. HMRC is still considering whether P11Ds will remain necessary for a small number of specialist cases, such as internationally mobile employees using modified payroll arrangements.

For all other benefits, employers will be required to report the benefit value directly through payroll, with associated income tax and Class 1A NIC collected in real time. As a result, payroll systems will need to handle more detailed and more frequent reporting. The transition could introduce additional complexity and increase the likelihood of errors if data flows or processes are not carefully managed.

The first year of payrolling may also create cash-flow pressures for both employers and employees. Some employees - particularly those subject to deduction limits or who may experience hardship - could see timing mismatches or higher initial deductions as the new system beds in.

The Current Benefit Reporting Framework

Under the existing rules, employers must report taxable benefits and expenses using forms P11D and P11D(b) by 6 July following the end of each tax year. The figures are calculated after year-end and submitted to HMRC.

Even if an employer has already chosen to payroll benefits in 2025/26, they must still file a P11D(b) to declare the Class 1A NIC due, and they must pay the NIC by 19 July (or 22 July when paying electronically).

Key Points:

• Reporting will move to the Full Payment Submission (FPS), the same real-time route currently used for salary information.
• Employers will need to supply additional data to ensure each benefit type is itemised clearly for HMRC, including details relevant to Class 1A NIC.
• If the value of a benefit cannot be determined until later - common with certain third-party benefits - an end-of-year adjustment will be required.
• All benefit-related entries will be removed from employee tax codes before the start of the 2027/28 tax year (except any outstanding underpayments from earlier years).
• HMRC have stated they will take a lenient approach in the first year, unless errors are deliberate. From 2028/29, penalties and interest will align with the existing voluntary payrolling regime, with further details expected in 2026.

If you're unsure how the new rules will affect your organisation, you can contact Friend Partnership to seek specialist advice.

What Actions Should Employers Take Now?

Even with the extended timeline, preparation should begin as soon as possible. 

Businesses should consider:

• Reviewing and updating internal processes, ensuring that benefit data is accurate, complete and available in real time.
• Assessing payroll system readiness and liaising with software providers about upcoming technical changes.
• Communicating early with employees, so they understand how payrolling will affect their take-home pay and tax deductions.
• Planning for an annual reconciliation check, as small real-time variances are common and can lead to under- or over-deductions if not monitored.
  

Employee FAQ: Payrolling Benefits in Kind

What does “payrolling benefits in kind” mean for me?
It means that the tax you owe on certain benefits your employer provides, such as company cars, medical insurance or other taxable perks will be collected directly through your monthly pay instead of being adjusted through your tax code or reported at year-end.

Will my take-home pay change?
Yes, potentially. Because the tax is deducted in real time, you may notice slightly lower take-home pay each month. However, this avoids the build-up of underpayments that sometimes happens under the current system.

Will I still get a P11D?
In most cases, no. From April 2027, P11Ds will only be issued for certain benefits that aren’t included in mandatory payrolling, such as employment-related loans or accommodation. If these apply to you, you may still receive a P11D.

What happens to my tax code?
HMRC will remove benefit-related adjustments from your tax code before April 2027. This helps make sure that the correct tax is collected through payrolling instead. Any underpayments from previous years will remain in your code until cleared.

Will this change how much tax I pay overall?
No. You won’t pay more or less tax - only the timing changes. Tax will simply be collected more evenly throughout the year.

What if the value of a benefit isn’t known straight away?
Some benefits (for example, those provided by external suppliers) may not have a confirmed value until later in the year. In these cases, your employer will make an adjustment after year-end once the final value is known.

Could this affect staff who have deduction limits or financial difficulties?
Possibly. Employees who are close to deduction limits or who might struggle with increased monthly deductions should speak to their employer. Employers are encouraged to plan for these situations to avoid hardship.

Do I need to do anything to prepare?
No. Your employer and HMRC will handle the changes. However, it’s a good idea to:

• check your payslips regularly,
• make sure your tax code looks correct, and
• ask payroll if you’re unsure how a benefit is being taxed.

Who should I contact if I have questions?
Your first stop should be your employer’s HR or payroll team, who can explain how your benefits are being processed. For tax-specific questions, you may also contact HMRC directly.