What are payrolling benefits and how will HMRC rules change in 2026/27?

From 6 April 2027, UK employers will begin a phased transition to mandatory real-time reporting of benefits in kind. For businesses still relying on spreadsheets, separate benefit records or manual year-end processes, the question is no longer whether payrolling benefits will matter, but whether their payroll and benefits processes are ready for the change.

The change is significant because HMRC is moving the reporting of certain benefits from end-of-year administration to real-time payroll reporting through Real Time Information (RTI). Phase 1 will cover company cars, car fuel, vans, van fuel and employer-provided medical benefits from 6 April 2027. Most other benefits are scheduled for Phase 2 from 6 April 2028.

What do payrolling benefits mean for UK employers?

Payrolling benefits means adding the taxable value of an employee benefit to their taxable pay during the tax year so that Income Tax is collected through PAYE. The employee does not receive the cash equivalent of the benefit as salary; the amount is used to calculate the tax due.

How does payrolling benefits work?

Under the current voluntary system, the employer calculates the taxable value of an eligible benefit and includes it in the employee’s payroll calculations. HMRC then adjusts the employee’s tax treatment so the benefit is not also included in their tax code. Paying your employees’ expenses and benefits through payroll can be highly effective, as it can help with the process of taxation. 

A payrolling example is, if an employee receives a taxable benefit with an annual taxable value of £600, the amount may be spread across the employee’s remaining pay periods. HMRC’s own example shows that a £600 gym membership can be divided across the relevant pay periods and taxed through payroll.

💡 Good to know: Payrolling changes the timing and administration of Income Tax. It does not make a taxable benefit tax-free. The tax treatment depends on the benefit and the applicable rules.

What is the difference between payroll and benefits administration?

Traditional payroll and benefits administration often involves maintaining salary information in one process and benefit information separately. Payrolling benefits brings the taxable treatment of eligible benefits into the regular payroll cycle.

This makes accurate data exchange especially important. Employers need reliable records of benefit type, taxable value, start and end dates and employee eligibility. A payroll dashboard can help employers monitor payroll costs and benefit data in one place, particularly when several payroll metrics are being tracked.

Why are employers moving towards mandatory payrolling benefits?

The main reason is that HMRC is making changes to the reporting of benefits in kind. Instead of relying primarily on year-end reporting, the new system will increasingly require real-time reporting through payroll software and RTI.

What are the benefits of payroll services for employers?

The benefits of payroll services that support payrolling include more regular tax collection, fewer separate year-end processes for payrolled benefits and better visibility of payroll information. Employers can also use integrated payroll and benefits software to reduce the need to reconcile separate records manually.

However, payrolling does not eliminate every reporting obligation. Employers must still calculate Class 1A National Insurance contributions on taxable benefits and complete P11D(b) where required.

⚠️ Warning: Do not assume that removing a P11D for a payrolled benefit removes the employer’s Class 1A NIC obligations. The two requirements are separate.

How can employers prepare before the 2027 deadline?

Employers should begin by reviewing their benefit inventory and identifying which benefits will fall into the first mandatory phase. They should then check whether their software to pay employees can support the required payroll data and RTI reporting processes. 

Which benefits can employers payroll in 2026/27?

For the 2026/27 tax year, employers can only payroll benefits for which they registered before 6 April 2026. The existing online service no longer allows employers to register or cancel registrations during the tax year.

Which benefits cannot be payrolled?

Under the current voluntary system, employers cannot payroll employer-provided living accommodation or interest-free and low-interest beneficial loans through the existing service. These benefits must continue to be reported through the relevant P11D process where applicable.

What will become mandatory from April 2027?

The first phase of mandatory payrolling begins on 6 April 2027. It covers company cars, car fuel, vans, van fuel and employer-provided medical benefits. Most other benefits in kind are scheduled to move to mandatory payrolling from 6 April 2028.

The timetable is therefore phased rather than a single switch for every benefit. This distinction matters for employers planning their payroll and benefits services because the required systems and processes may need to expand in stages.

How do payrolling benefits affect tax and National Insurance?

Payrolling benefits affect the timing of Income Tax collection, while employers remain responsible for the relevant National Insurance treatment. The taxable value of the benefit is processed through payroll, but Class 1A NICs remain an employer liability where applicable.

How is tax collected through payroll?

The taxable value of the benefit is added to the employee’s taxable pay for payroll purposes. This means the employee pays the relevant Income Tax during the tax year rather than having the tax collected later through an adjustment to their tax code.

📌 Example: HMRC’s guidance shows that if a benefit is valued at £600 for the year, the employer can allocate the taxable amount across the employee’s remaining pay periods rather than waiting for a year-end adjustment.

Does payrolling remove P11D and P11D(b) duties?

Payrolling removes the need to submit a P11D form for a benefit that has been correctly payrolled. However, employers must still calculate Class 1A NICs and complete P11D(b) where required. Benefits that have not been payrolled may still need to be reported through electronic P11Ds.

What happens when an employee’s benefit changes?

When an employee leaves, there are changes affecting benefits and expenses. The benefit, or the value of a benefit changes, and the employer must recalculate the taxable amount that should be processed through payroll. Simply continuing the previous figure may create an incorrect tax result.

How should employers handle a benefit change?

The employer should calculate the taxable value before the change, calculate the revised value after the change, deduct the amount already payrolled and distribute the remaining taxable amount across the remaining paydays.

📌 Example: HMRC provides an example where an employee changes company car during the tax year. The employer calculates the taxable value for the first car, adds the value for the replacement car and then deducts the amount already processed through payroll.

What happens if an employee leaves?

If an employee leaves before the full taxable value of a benefit has been processed, the employer must calculate the remaining amount. Depending on the circumstances, the remaining amount may be included in the final payroll submission or reported through a P11D.

If the final payroll has already been submitted, HMRC may need to collect the outstanding tax directly from the employee. This is one reason why accurate salary processing software and timely benefit updates matter.

How should employers choose payroll software for payrolling benefits?

Employers preparing for mandatory reporting should assess whether their payroll platform can handle benefit values, changes, RTI reporting and payroll records without relying on disconnected spreadsheets. The right pay employees software should support accurate data flows rather than simply process monthly salaries.

Which features should employers look for?

As mandatory payrolling is introduced, employers should assess whether their payroll software can calculate and report taxable benefits in kind through payroll and Real Time Information (RTI). The system should also allow employers to update taxable values when benefits change and make corrections during the tax year where necessary.

When reviewing payroll software, employers should consider whether it can:

• Calculate and process taxable benefit values

• Update benefit information when an employee’s circumstances change

• Support real-time reporting through RTI

• Handle corrections to taxable benefit values during the tax year

• Provide the data required for accurate benefits-in-kind reporting

Are payroll and benefits outsourcing services suitable for every employer?

Payroll and benefits outsourcing can help employers access specialist payroll expertise, while integrated payroll platforms can give internal teams more direct control over payroll data. The best option depends on the employer’s workforce size, benefit complexity and internal resources.

Employers comparing payroll services with benefits, payroll and benefits services or payroll and pension services should check exactly which responsibilities are included. A provider that processes salary payments may not automatically manage benefit valuation, P11D reporting or Class 1A NIC calculations.

How can employers prepare for mandatory payrolling benefits?

Employers should use the 2026/27 tax year to audit their benefits, review payroll data and prepare for the first mandatory reporting phase beginning on 6 April 2027. The most effective preparation is practical: identify affected benefits, confirm data ownership and test the payroll process before reporting becomes mandatory.

What should employers do before 6 April 2027?

Employers should begin preparing for mandatory payrolling by reviewing the benefits they provide and checking that the relevant employee and benefit information is accurate and up to date. They should also review their payroll software and internal processes to ensure they can support the real-time reporting of benefits in kind from 6 April 2027.

What should employers monitor after implementation?

Employers should monitor payroll accuracy, benefit changes, employee queries and RTI submissions. Payroll data can also help organisations analyse total payroll costs and identify trends across salaries and benefits.

For the first mandatory year, HMRC has stated that certain non-deliberate inaccuracies in RTI returns will not attract penalties unless there is evidence of deliberate non-compliance. However, existing late filing and late payment penalties continue to apply, and the rules for P11D and P11D(b) remain relevant where those forms are still required.

⚠️ Warning: The temporary easement does not mean employers can ignore reporting deadlines or submit inaccurate information deliberately. Employers should still maintain robust controls from the start of mandatory payrolling.

The 2026/27 tax year is a preparation period for businesses that will be affected by the first phase of mandatory payrolling benefits. Employers should identify affected benefits, review taxable values, confirm their payroll technology and establish clear processes for communicating changes before 6 April 2027.

The strongest preparation is not simply choosing software to pay employees. It is creating a connected process that links payroll, employee records, benefit data and reporting obligations. By reviewing these systems before the first mandatory phase begins, employers can reduce manual reconciliation and make their payroll and benefits processes easier to manage as HMRC’s phased reforms continue.

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