Mandatory payrolling of benefits delayed until 2027

As part of HMRC’s plan to simplify and modernise the UK tax system, employers who provide taxable benefits in kind to their employees will be required from April 2027 (originally April 2026) to report these benefits (and pay the Class 1A national insurance contributions (NIC) due) via payroll.  

This was originally planned to take place from 6 April 2026, but has now been pushed back to 6 April 2027 as announced by HMRC on 28 April 2025.  

This represents a significant change for most employers, who currently submit forms P11D and P11D(b) to HMRC following the end of the tax year.  

Below, we look at some of the key questions which employers may have in advance of these changes.  

What is a taxable benefit in kind?

A benefit in kind is remuneration paid to an employee which is not paid to them in cash.  Benefits in kind can be a cost and tax effective away of incentivising and rewarding employees and can be tailored for the needs and priorities of your workforce.   

More information on this can be found here: What is a taxable benefit in kind?  

How will benefits in kind be reported to HMRC from April 2027?  

From April 2027, taxable benefits will be reported to HMRC (and Class 1A NIC will be paid) in real time via payroll.  This is generally referred to as ‘payrolling’ of benefits.  This will be done via the full payment submission (FPS) submitted to HMRC following each pay period, typically each month. 

This is the same system by which income tax and Class 1 NIC is reported, withheld and paid over to HMRC in respect of employees’ salaries.  

The employer works out what the yearly value of the benefit is, divides this by the number of pay periods in the year and this amount is taxed each period.  If there are any changes to the benefit amount throughout the year, the amount can be adjusted.  

With limited exceptions, forms P11D and P11D(b) will no longer be required. 

When might forms P11D still be required?  

Benefits may still be reported via form P11D and form P11D(b) where they relate to the provision of interest free (or low interest) loans to employees, or the provision of accommodation to employees.   

For these benefits, employers will have the option to report these via payroll on a voluntary basis. However, there will be no obligation to do so at this time.  It is expected that the Government will make the payrolling of these benefits mandatory in future, and further guidance on this will become available in due course. 

How will the position change for employers already payrolling benefits voluntarily?  

Since April 2016, it has been possible to payroll benefits in kind on a voluntary basis.  Those employers already doing this will likely find the transition to the mandatory payrolling system easier to navigate.  

However, there are some changes for these employers as well:

Currently, the voluntary payrolling system allows income tax on benefits in kind to be collected via PAYE.  However, Class 1A NIC is still paid following the end of tax year in respect of voluntarily payrolled benefits, alongside submission of form P11D(b).    

While this will remain the case for the 2025/26 and 2026/27 tax years, from April 2027, Class 1A NIC will also be paid via payroll throughout the year, and no form P11D(b) will be required unless it relates to non-payrolled employee loan or accommodation benefits.  

In addition, the benefits relating to employee loans or accommodation could not previously be included in the voluntary payrolling system.  This will change from April 2027 as covered above.   

How will these changes affect reporting of benefits under a PAYE Settlement Agreement?  

Some employers report and pay tax and NIC on employee benefits under a PAYE Settlement Agreement (PSA).  Where benefits are covered by a PSA, the employer will pay the income tax on behalf of their employees (grossed-up for their marginal rate of tax) and pay Class 1B NIC on the total value of the benefit and income tax paid.  

The introduction of mandatory payrolling of benefits will not have any effect on benefits reported under a PSA.  

What should employers do in advance of these changes?  

As an employer, you will need to:

• Check whether your current payroll software meets the functionality requirements to allow you to payroll benefits.
• Consider educating your employees on the changes. Employees in receipt of payrolled benefits for the first time (whether voluntary or mandatory) should be advised to check their PAYE code to make sure that any adjustments relating to the now payrolled benefits are removed to ensure that income tax is not collected twice on the same benefit.  
• Employees will also need to be made aware of the potential impact the reporting may have on their net income and whether this may cause cashflow issues.
• Be aware that all benefit data throughout the year must be accurate, reliable and available in ample time for the payroll reporting so it can be processed. Errors when reporting could result in potential penalties and/or have a direct impact on the net pay of your employees.
• Consider whether it is time to review your overall benefit offering before the changes are brought in to ensure your benefit package is up to date. 

Please refer to our Payrolling of Employee Benefits article for more information on this.

Further information

If you want any further information on payrolling benefits, please contact your normal Bishop Fleming contact or a member of the Employer Solutions team.