HMRC has now provided further detail on its phased introduction of mandatory payrolling of Benefits in Kind, confirming that real-time reporting of benefits through payroll will become a reality for most employers over the next two years.
HMRC’s decision to delay and phase implementation, the latest announcements make it clear that businesses should not view the additional time as a reason to postpone preparations. For many organisations, the move to mandatory payrolling will involve significant changes to payroll, HR, benefits administration and employee communications.
The new timeline
HMRC confirmed a two-phase approach will be adopted based on benefit categories as opposed employee headcount or size of the employer. We set out below when benefits will be subject to payrolling:
Phase 1: From 6 April 2027
Mandatory payrolling will apply to:
- Company cars
- Car fuel
- Vans
- Van fuel
- Employer-provided medical benefits
These benefits account for a substantial proportion of all benefits which are currently reported to HMRC on Forms P11D and will have the greatest impact.
Phase 2: From 6 April 2028
Mandatory payrolling will be extended to most remaining taxable benefits and expenses. However:
- Employment-related loans, including director loan accounts; and
- Taxable living accommodation
will remain outside the mandatory regime. However, employers can choose to operate payrolling of both benefits on a voluntary basis (see further comments below)
Why this matters
For many years, employers have been able to rely on the annual P11D process to identify and report taxable benefits after the end of the tax year.
The new regime fundamentally changes this approach. Instead of reporting benefits retrospectively, employers will need to identify, value and report taxable benefits throughout the year via payroll. Income Tax and Class 1A National Insurance will increasingly be accounted for in real time. The challenge for employers is not simply one of payroll compliance. This is a business transformation project that will require coordination between payroll, HR, finance, reward and benefits teams.
Strategic priorities ahead of Phase 1
Understand Your Current Benefits Population
Many employers have never undertaken a comprehensive review of all benefits currently reported on Forms P11D.
Now is the ideal opportunity to:
- identify all benefits currently provided;
- review how benefit values are determined;
- identify who owns the underlying data; and
- assess the quality of existing reporting processes.
Employers should not assume that existing P11D processes will automatically be suitable for real-time reporting.
Review Data Flows
One of the biggest practical challenges is ensuring that benefit information reaches payroll quickly enough. This reform will fundamentally change how benefits are taxed and reported. The following are the areas employers need to address ahead of the Phase 1 and 2 deadlines:
Payroll
Employers will need to ensure payroll systems can manage real-time reporting, improve internal processes, and prepare employees for changes to how benefits are taxed.
Secondly, ensure the value of the benefits which are going to be payrolled are determined and steps are taken to ensure any changes in the benefit valuation are incorporated into your payroll reporting cycle.
Internal systems
Employers will need to ensure that all systems connected with the provision of benefits in kind will provide you with the best opportunity to manage payrolling of benefits. In addition to your payroll system, employers need to ensure HR and benefits platforms can collate data, for example, benefits reports and employee data so that accurate RTI submissions can be made to HMRC.
Governance procedures
Consider how you are going to track new joiners and leavers? Once employees are entitled to receive any benefits you will need to ensure any variations in the benefits provided are correctly captured. Consequently, employers will need to review their processes for:
- New joiners
- Leavers
- Changes of company car
- Medical cover changes, such as extended cover and contributions towards family members being included in the scheme
- Salary sacrifice arrangements
- Increases or decreases in the cost of providing benefits.
How are you going to manage the position for employees where insufficient PAYE has been collected during the year? You may need to submit a P11D for the employees affected or revised RTI submissions.
Employee communications
Employees will need to be advised about the introduction of PBiK and the impact it will have on the amount of tax which will be deducted from their salary. A clear communication strategy is recommended which can include staff briefings, written communications or both. However, doing nothing is not an option!
HMRC themselves have specifically highlighted the importance of employee communications. Many employees currently settle tax on benefits through adjustments to their tax code and may notice differences in their monthly net pay once benefits are processed through payroll.
Employers should consider a communications strategy covering:
- why the changes are occurring;
- the impact on payslips;
- tax code changes;
- the continued collection of previous year underpayments; and
- who employees should contact if they have questions.
Early engagement should help minimise employee confusion and payroll queries.
Looking ahead to Phase 2
Although April 2028 may appear some distance away, employers should already be considering the wider implications of Phase 2.
Many businesses currently devote considerable time to producing annual P11Ds for a wide range of benefits. The move to real-time reporting provides an opportunity to:
- simplify benefit processes;
- eliminate manual reporting;
- improve benefit governance; and
- modernise payroll and reward operations.
Employers that wait until late 2027 to begin preparations may find themselves tackling significant implementation challenges alongside competing payroll and HR projects.
The voluntary payrolling opportunity
A particularly interesting feature of HMRC’s latest guidance is the continued ability to voluntarily payroll benefits not included within Phase 1. HMRC has confirmed that a registration service for voluntary payrolling will open from November 2026 until 5 April 2027.
This creates an opportunity for employers to accelerate their transition to the new regime.
Rather than waiting for mandatory implementation, organisations may wish to consider voluntary payrolling of additional benefits from 2027 in order to:
- reduce future reliance on Forms P11D;
- test internal processes before Phase 2 becomes mandatory;
- identify data and systems issues early;
- familiarise employees with payrolled benefits; and
- spread implementation costs over a longer period.
For some employers, a phased voluntary approach may prove more manageable than a large-scale transition immediately before April 2028.
Concluding thoughts
HMRC’s phased approach provides welcome breathing space, but it should not be interpreted as a delay to action. The move to mandatory payrolling represents the biggest change to the taxation of employee benefits for many years.
Employers should use the period before April 2027 to review benefit arrangements, strengthen governance processes, engage stakeholders and assess whether voluntary payrolling of additional benefits could provide a smoother route to full compliance.
Organisations that start planning now will be better placed to reduce risk, minimise disruption and take advantage of the opportunities presented by the new reporting framework.
Please contact the HaysMac Employment Tax team if you would like to discuss how mandatory payrolling may affect your organisation and the steps that should be taken before April 2027.
