The Government has confirmed a phased introduction of mandatory payrolling for benefits in kind, changing how employers report and account for employee benefits. While mandatory payrolling was originally expected to apply to all benefits from 6 April 2027, the rollout will now happen in stages.
For employers, payroll teams and business owners, this change is more than an administrative update. It alters reporting requirements, affects the timing of tax payments and will ultimately reduce reliance on traditional P11D reporting.
Understanding what is changing and when will help businesses prepare well in advance.
What Is Payrolling?
Payrolling benefits in kind means the taxable value of a benefit is processed through an employee’s payroll rather than being reported separately after the end of the tax year.
Under this approach, the value of a benefit is treated as additional taxable income throughout the year. Income tax is collected through PAYE as part of the normal payroll process.
For example, imagine an employee receives private medical insurance with a taxable value of £600 per year. Instead of reporting that benefit at year-end on a P11D, the annual value is spread across the year. For a monthly paid employee, £50 would be added to taxable earnings each month for PAYE purposes.
The employee pays the tax during the year rather than after the tax year has ended through an adjustment to their tax code.
Importantly, most benefits in kind remain subject to Class 1A National Insurance rather than Class 1 National Insurance. As a result, the payrolled amount is generally not included in earnings for National Insurance calculations.
When Does Mandatory Payrolling Start?
The implementation will take place in two phases.
From 6 April 2028, mandatory payrolling will extend to almost all remaining benefits in kind.
The exceptions are:
- Taxable cheap loans
- Living accommodation benefits
These benefits can still be payrolled voluntarily from April 2027, provided employers register before the start of the relevant tax year.
A mandatory start date for these remaining categories will be introduced at a later stage.
Why Is HMRC Introducing Mandatory Payrolling?
The move forms part of HMRC’s wider drive towards real-time tax reporting and administration.
Historically, employers provided details of benefits after the tax year ended using P11D forms. Tax liabilities were often collected through employee tax codes in future years, creating delays and administrative complexity.
Mandatory payrolling moves tax collection into the year in which benefits are received.
From HMRC’s perspective, this creates:
- More accurate tax collection
- Reduced administrative burden
- Fewer tax code adjustments
- Better alignment with real-time reporting
For employees, it can reduce surprises caused by tax code changes and underpayments that emerge after year-end.
The Impact on Class 1A National Insurance
One of the most significant changes affects the timing of Class 1A National Insurance contributions.
Currently, employers calculate Class 1A National Insurance through the annual P11D(b) process. Payment is normally due after the end of the tax year.
Under the new mandatory payrolling regime, associated Class 1A National Insurance will be reported through Real Time Information (RTI) and submitted as part of the Full Payment Submission.
This means employers will pay the liability throughout the year alongside PAYE and Class 1 National Insurance.
Why Cash Flow Matters
Although the total liability may not change, the timing certainly does.
Many businesses currently benefit from retaining funds until the annual Class 1A settlement becomes due.
With monthly reporting and payment requirements, employers will need to budget for earlier payments and review cash flow forecasts accordingly.
For businesses operating with tight margins or seasonal cash flows, this may require advance planning.
What Happens to P11D and P11D(b) Forms?
The introduction of mandatory payrolling signals the gradual disappearance of the P11D for most employers.
Changes to P11D Reporting
Where a benefit is payrolled, it will no longer need to be reported on a P11D.
As mandatory payrolling expands, fewer benefits will require separate reporting.
By the 2028/29 tax year, P11Ds will generally be needed only for:
- Taxable cheap loans that are not payrolled
- Living accommodation benefits that are not payrolled
For most other benefits, payroll reporting will replace traditional year-end disclosures.
Changes to P11D(b)
The P11D(b) will also have a reduced role.
Since Class 1A National Insurance on mandatory payrolled benefits will be reported and paid during the year, those benefits will no longer form part of the annual P11D(b) calculation.
From 2028/29 onwards, the P11D(b) is expected to be relevant primarily for taxable cheap loans and living accommodation benefits where payrolling has not been adopted.
How Should Employers Prepare?
Although April 2027 may feel some distance away, preparation should begin sooner rather than later.
Employers should:
- Review all benefits currently provided to employees.
- Confirm whether payroll software will support mandatory payrolling requirements.
- Assess reporting processes and internal controls.
- Budget for earlier Class 1A National Insurance payments.
- Communicate future changes to employees.
- Consider whether voluntary payrolling of some benefits makes sense before mandatory implementation.
Businesses that plan ahead are likely to experience a far smoother transition than those leaving preparation until the last minute.
Final Thoughts
Mandatory payrolling of benefits in kind represents one of the most significant payroll reporting changes in recent years. While the phased rollout provides additional breathing space, employers should not view the delay as a reason to postpone planning.
The move towards real-time reporting will simplify some aspects of benefit administration but will also bring new payroll, reporting and cash flow responsibilities.
Understanding the timetable, reviewing existing benefit arrangements and preparing systems in advance will help ensure compliance and minimise disruption.
For more practical payroll, tax and business guidance, explore other articles in the I Hate Numbers knowledge hub and discover how proactive planning can turn tax changes into manageable business processes.
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