Mandatory payrolling of benefits in kind: what employers need to know

From April 2027, HMRC will begin mandatory payrolling of benefits in kind, moving away from the current system of year-end reporting towards real-time deductions through payroll. HMRC has confirmed a two-phased approach: only selected benefits will be subject to mandatory payrolling from April 2027, with full payrolling expected from April 2028 (subject to certain exclusions discussed below). Draft guidance was published alongside the Autumn Budget 2025, and updated on 31 July 2026, to help employers prepare for the upcoming changes. In this article, we take a closer look at what is changing, what it means in practice for employers and employees, and the steps businesses should be taking now to get ready.

What are the current reporting mechanisms?

Under the existing regime, the taxable value of benefits and expenses provided to employees is typically reported via Forms P11D and P11D(b) by 6 July following the end of the relevant tax year, unless the employer has voluntarily registered to payroll benefits with HMRC. Once an employer reports the total value of benefits by that deadline, the employee either pays the additional tax to HMRC through a tax code adjustment or settles the amount due via their self-assessment tax return.

The phased approach to mandatory payrolling

The new regime involves moving away from the current year-end reporting mechanism towards a new system of real-time deductions through payroll. The mandatory payrolling of benefits regime will now apply in two phases:

• Phase 1 (from 6 April 2027): company cars, car fuel, vans, van fuel, and employer-provided medical benefits. HMRC considers that 92% of all benefits reported on Forms P11D fall under this category and many employers will therefore be impacted by the upcoming changes.
• Phase 2 (from April 2028): all other benefits brought into scope of mandatory payrolling, except for employer-provided living accommodation and beneficial loans.

Changes to Class 1A National Insurance Contributions

It is not just income tax that is changing. Currently, employers pay Class 1A NICs on benefits in kind annually, with payment due by 22 July following the end of the tax year (or 19 July for non-electronic payments). Under the new regime, Class 1A NICs will be calculated and paid in real time through the payroll, alongside income tax.

This represents a significant cash flow change as the Class 1A NIC liability will no longer be deferred until after the end of the tax year. In July 2027, employers will still need to pay the Class 1A NICs for benefits provided in the 2026/27 tax year under the current P11D system, while also starting to pay Class 1A NICs in real time for benefits provided from April 2027 onwards. This results in a one-off overlap where two sets of Class 1A NICs are due in the same financial year. For this transition year, employers should ensure their budgets reflect this dual payment obligation.

Internationally mobile employees

Employers with internationally mobile employees should consider how benefits will be reported from April 2027. This is particularly relevant where employees remain UK tax resident, are entitled to benefits within scope of mandatory payrolling, and are not on a modified payroll. Benefits will be taxed as they arise rather than through year-end adjustments. Employers may need to estimate taxable values at the beginning of the year rather than adjusting in-year or at year-end.

Employers should also consider whether their payroll processes can cope with managing employees on secondment from overseas or with handling benefits that other group companies provide. It is important to be prepared to handle payrolling responsibilities, even when reliant on another company for the provision of the benefit.

Penalties for non-compliance

To support the smooth introduction of this change, HMRC has confirmed that employers who have made an error related to mandatory payrolling in their RTI returns for the 2027/28 tax year will not be charged penalties for inaccuracies unless there is evidence of deliberate non-compliance.

However, late filing and late payment penalties for RTI returns may still apply where returns are not sent on time or payment is not made on time, as will statutory late payment interest. Employers should ensure they have the right processes in place to avoid errors.

Key actions for employers

The move to mandatory payrolling of benefits in kind is one of the most significant changes to employer reporting obligations in recent years.

While April 2027 may feel some way off, the practical and cultural shift involved should not be underestimated, and preparing early is the key to a smooth transition with minimal disruption, cost, and impact on employees. Early engagement with payroll providers, internal stakeholders, and employees now will make all the difference when the new rules take effect.

With the phased rollout fast approaching, there are a number of things that employers should be thinking about to get ready for the upcoming changes:

1. Audit current benefits provision to identify which benefits are affected in Phase 1 (April 2027) and Phase 2 (April 2028).
2. Review payroll software and systems to ensure they can process benefits in kind and calculate the correct tax and Class 1A NICs in real time. Payroll software will be updated ahead of the upcoming changes to include the appropriate FPS fields to payroll benefits in kind. Employers should ensure they have sufficient time to test whether the payroll software is correctly mapping benefits to the correct FPS fields, feeding through to employees’ taxable pay, and calculating the correct amount of Class 1A NICs due.
3. Update budgeting and cash flow forecasts to account for real-time payment of Class 1A NICs.
4. Communicate with employees about how the changes may affect the timing of tax deductions and how this could impact their take-home pay.
5. Engage with third-party benefit providers to assess how quickly the required information can be sent to your payroll team. Whilst there will be a mechanism to “true-up” benefit values that change following the end of the tax year, this is intended only for minor instances requiring a reconciliation process. Rather than relying on this mechanism, employers should be taking steps to ensure they can comply.