Payrolling benefits in kind: what employers need to do

For years, employers have been able to choose whether to payroll benefits in kind or report them annually on a P11D. From 2027, that choice starts disappearing. Mandatory payrolling phases in over two tax years, and while the first deadline is still a little way off, the systems and data flows behind it need sorting out well before then — not in the weeks before go-live.

What's changing

Instead of reporting most benefits once a year after the event on a P11D, employers will report their taxable value through the Full Payment Submission (FPS) — the same real-time system already used to report pay and tax to HMRC each payday. Income Tax on the benefit is collected through PAYE as it's provided, rather than being coded out or settled the following year.

Phase 1: from 6 April 2027

Mandatory payrolling begins with the benefits that are most common and most straightforward to value in real time:

• Company cars
• Car fuel benefit
• Employer-provided vans
• Van fuel benefit
• Employer-funded private medical insurance

Ahead of 6 April 2027, HMRC will remove these benefits from affected employees' tax codes, since the tax will now be collected through real-time payroll instead. New FPS data fields let employers report each benefit type, and where an employee has more than one benefit attracting Class 1A National Insurance — a car and medical cover, for example — the values can be combined within the relevant Class 1A data items.

Phase 2: from April 2028

Most remaining benefits in kind move onto mandatory payrolling a year later, from April 2028. HMRC's detailed guidance for this phase is still developing, so the practical steps below focus on getting ready for Phase 1 first.

What stays voluntary — for now

Employer-provided loans and living accommodation are excluded from the mandate in both phases. Employers will still be able to payroll these voluntarily if they choose to, but there's no requirement to, and no confirmed date for that to change.

P11D and P11D(b) during the transition

Once a benefit is payrolled under the mandate, it comes off the P11D entirely — but any benefits an employer hasn't payrolled (Phase 2 benefits before April 2028, and anything that stays voluntary) still need reporting on a P11D in the usual way. For most employers, that means running real-time payroll reporting for some benefits alongside the familiar annual P11D process for others, for at least the 2027/28 and 2028/29 tax years. Keeping track of which benefit sits where is the single biggest administrative risk in the transition.

The July 2027 overlap

This is the point that catches employers out. Class 1A National Insurance on benefits provided during 2026/27 is still due by 19/22 July 2027 under the existing P11D(b) system — that liability doesn't go away just because payrolling has started. At the same time, real-time Class 1A on Phase 1 benefits provided from April 2027 onward is already being collected through payroll. In practical terms, July 2027 is when an employer settles last year's benefits bill under the old rules while already mid-way through paying this year's under the new ones. It's worth building that one-off overlap into 2027/28 cashflow forecasts now, rather than discovering it in the month itself.

What employees will see

Employees with Phase 1 benefits will notice two changes: their tax code changes ahead of April 2027 as the benefit is removed from it, and the tax on their benefit then appears as a regular deduction on every payslip instead of a single adjustment the following year. Some employees may initially think they're being taxed twice, or being taxed more, when in fact the same tax is simply being collected more evenly through the year rather than in one coding adjustment. A short explanation alongside the April 2027 payslip — even a line in a covering email — heads off most of these queries before they reach payroll or HR.

Getting ready during 2026/27

With the first deadline now under 18 months away, the practical groundwork is worth starting this tax year:

• List every benefit currently provided, and identify which fall into Phase 1.
• Check your payroll software's roadmap for the new FPS data fields — most major providers have already signalled their plans.
• Confirm how fleet providers, insurers and any benefit administrators will supply the data payroll will need each pay period, not just once a year.
• Plan employee communications for the tax code changes and payslip differences ahead of April 2027.
• Build the July 2027 Class 1A overlap into cashflow planning.