Mandatory Payrolling of Benefits in Kind: what employers need to know

Benefits in Kind remain a major part of the UK tax landscape. HMRC data shows that more than 900,000 employees receive company car benefits, generating over £3 billion in taxable value each year.

With such widespread use, HMRC is moving benefit reporting into payroll to improve accuracy, reduce administrative pressure, and phase out reliance on annual P11D forms. Over time, this should make the process more streamlined and manageable for employers.

Mandatory payrolling will begin in April 2027, with further expansion in April 2028 – marking one of the most significant payroll changes employers will navigate over the next two years.

 

What are Benefits in Kind?

Benefits in Kind are non-cash benefits provided to employees, including:

• Company cars
• Private medical insurance
• Interest-free or low-interest loans
• Employer provided rental accommodation
• Other employee perks and allowances

These are currently reported through annual P11D forms or voluntary payrolling.

 

What’s changing and when will it come into force?

HMRC has confirmed that most employee benefits will soon need to be reported directly through payroll rather than through annual P11D forms. The change will be introduced in two stages: the first from 6 April 2027, with further benefits added from 6 April 2028.

This shift supports HMRC’s wider digital direction – fewer year‑end submissions, clearer real‑time information, and more accurate PAYE deductions throughout the year.

Under the new rules, benefit values will be processed through payroll as they arise, with PAYE and Class 1A National Insurance applied in real time rather than at year end. For many employers, this will mean adjusting systems and processes, so benefits are captured cleanly and consistently.

 

Phase 1: From 6 April 2027

From 6 April 2027, several of the most common Benefits in Kind will move into mandatory payrolling:

• Company cars
• Car fuel
• Vans
• Van fuel
• Employer‑provided medical benefits

These benefits represent the largest share of BIK reporting, so HMRC is prioritising them for early transition into payroll.

Under Phase 1, employers will need to ensure these benefits are:

• Reported in real time as part of the payroll cycle
• Processed for PAYE and Class 1A National Insurance through payroll rather than at year end

This marks a shift towards cleaner, more accurate benefit reporting, with payroll systems and processes capturing benefit values consistently throughout the year. While employers will need to prepare for the change, the move is designed to make reporting more streamlined, giving businesses greater clarity

 

Phase 2: From 6 April 2028

From 6 April 2028, mandatory payrolling will widen to cover most remaining Benefits in Kind. A small number of benefits will remain outside the compulsory rules:

• Beneficial loans
• Living accommodation

These can continue to be payrolled on a voluntary basis if employers choose to do so.

Phase 2 also marks the point at which payrolling becomes the standard approach for reporting employee benefits.

 

What employers should be thinking about now

As the changes approach, this is an ideal moment for employers to assess their current processes – whether payroll is managed in‑house or outsourced.

Early checks will make the transition smoother and help ensure benefit reporting is accurate from day one.

 

You may find it helpful to:

• Review benefit arrangements – understand which benefits you offer, how they’re currently reported, and whether any changes are needed ahead of real‑time reporting.

 

• Check payroll software capability – confirm your systems can capture and process Benefits in Kind within payroll.

 

• Assess payroll data quality – clean, consistent data will be essential for accurate benefit valuations.

Speak to your payroll provider – early conversations can help identify gaps, avoid last‑minute disruption and give you confidence that your payroll is ready.

 

Is your payroll ready for 2027?

The move to mandatory payrolling is an important change for employers.

Benefits will need to be valued accurately, and the right information captured through payroll throughout the year, rather than being dealt with at year-end.

Preparing early can make the transition smoother and help make ongoing reporting more straightforward.

 

If you’d like practical guidance on reviewing your benefit arrangements or getting your payroll ready, speak to Sally Craythorn and the payroll team.