Benefits in kind are moving into payroll – what employers need to prepare for

HMRC is urging employers to start preparing for major changes to the way benefits in kind are reported and taxed.

From 6 April 2027, the first group of benefits will have to be reported through payroll in real time, rather than being dealt with mainly through the annual P11D process after the end of the tax year. HMRC highlighted the preparations employers should now be making in its August 2026 Employer Bulletin.

Which benefits are changing first?

The introduction will now be phased rather than applying to almost all benefits at once.

From 6 April 2027, mandatory payrolling will apply to:

• company cars;

• car fuel;

• vans;

• van fuel; and

• employer-provided medical benefits.

Most other taxable benefits are then expected to move into mandatory payrolling from April 2028. Employment-related loans and accommodation are currently excluded from mandatory payrolling and will remain voluntary for the time being.

Read HMRC's guidance on the phased introduction

What does mandatory payrolling mean?

For the benefits included in the first phase, employers will have to report the taxable benefit through their payroll software using the Full Payment Submission (FPS).

This means the employee's Income Tax, together with the employer's Class 1A National Insurance liability, will be reported in real time rather than the benefit simply being reported after the tax year has ended.

The intention is that employees pay tax on these benefits during the same tax year in which they receive them.

Employees may notice a change in take-home pay

Employers will also need to think about how the change is explained to employees.

Some employees currently have estimated benefits included in their PAYE tax code, while others may effectively pay tax later through an adjustment to their tax code. From April 2027, tax on the affected benefits will instead be dealt with through payroll during the year.

There may therefore be situations where an employee is paying tax on their current benefit while also repaying an underpayment relating to an earlier year. HMRC has specifically warned employers to explain this carefully, as it could otherwise appear that the employee is being taxed twice.

What should employers do now?

HMRC recommends that employers review all benefits currently provided to employees, identify which will fall within the first phase, and check that their payroll processes will be able to deal with the new reporting requirements.

Employers should also consider how they will obtain information promptly where benefits change during the year, or where an employee joins or leaves part-way through a tax year.

There will be no need to register separately to payroll the benefits that become mandatory from April 2027. For other benefits, HMRC expects a new voluntary registration service to open in November 2026, with registration required by 5 April 2027 where an employer wishes to payroll those benefits voluntarily for 2027/28.

HMRC expects to publish final guidance for the first phase alongside the Autumn Budget 2026, so employers should keep the position under review as April 2027 approaches.

Read HMRC's full interim guidance on mandatory payrolling of benefits in kind

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Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.