For decades, reporting employee benefits to HMRC followed a familiar rhythm. You gave your staff a perk — a company car, private health cover, a cheap loan — and once a year, usually in early July, you filed a P11D to tell HMRC what you had provided. HMRC then adjusted the employee’s tax code accordingly.
That system is being scrapped. From 6 April 2027, HMRC is making payrolling of benefits in kind mandatory for all employers and almost all benefits. The annual P11D will no longer be the primary reporting mechanism. Instead, employers will be required to include the taxable value of benefits in payroll calculations every single month, with income tax and National Insurance collected in real time.
This is the biggest structural change to benefits reporting in a generation. Here is what it means in practice.
What is changing with P11?
From 6 April 2027, instead of reporting benefits annually, you will include the taxable value of each employee’s benefits in their payroll calculation each pay period. You work out the yearly value of the benefit, divide it by the number of pay periods in the year, and add that notional amount to the employee’s taxable pay each month. Income tax is then collected on it in real time, just like it is on salary.
Class 1A National Insurance — currently paid in one lump sum each July — will also move to real-time reporting and payment from April 2027. The P11D(b) will no longer be required for payrolled benefits.
The change is being phased in. From April 2027, the first phase covers motoring benefits (company cars and vans) and employer-provided medical benefits such as private health insurance. From April 2028, full mandatory payrolling extends to almost all other benefits.
What is not changing – yet
Two categories are excluded from mandatory payrolling for now: employment-related beneficial loans and living accommodation. P11Ds will still be required for these benefits after 2027, at least in the short term. HMRC has indicated it plans to bring these into mandatory payrolling at a later date.
PAYE Settlement Agreements, where an employer covers tax on certain benefits on behalf of employees, also remain in place under the existing rules.
The hidden trap: the double tax overlap
There is a practical issue that every employer with benefits needs to understand before April 2027, and every employee needs to be warned about in advance.
Under the current system, tax on benefits is collected retrospectively — an employee receives a benefit in 2025/26 and pays the tax on it during 2026/27 through a lower tax code. When payrolling begins in April 2027, that old tax code adjustment will still be running at the same time as the new real-time deduction on the 2027/28 benefit.
That means some employees will effectively be paying tax on two years’ worth of benefits at once during the transition year. Their take-home pay will drop — not because they are earning less, but because of how the changeover works. HMRC acknowledges this overlap as a known consequence of the transition.
The way to handle this is communication. Employees who receive benefits need to understand what is happening, well before their April 2027 payslip arrives. Being caught off guard by an unexpected drop in take-home pay — with no explanation — creates exactly the kind of trust problems that are hard to recover from.
What employers need to do before April 2027
- Audit your current benefits: List every benefit you provide to every employee and director, with values. Know what is covered by phase one (motoring and medical) and what comes in phase two.
- Check your payroll software: The software will need to support real-time benefits reporting via Full Payment Submission. Most mainstream systems are already working on this — check with your provider.
- Understand the Class 1A NIC change: Currently paid once a year in July, this moves to monthly reporting and payment. Model the cash flow impact now rather than in March 2027.
- Communicate with employees: Give your staff clear, written notice that their payslips will change from April 2027 and explain why. Be specific about the overlap effect and what it means for their take-home pay.
- Consider voluntary payrolling for 2026/27: If you want a practice run before it becomes compulsory, you can register with HMRC to payroll benefits voluntarily for the current tax year. Registration for 2027/28 is expected to open in November 2026.
- Plan for variable benefits: Some benefits change value during the year — for example, a car benefit where the list price changes, or a loan where the balance varies. You will need a process for adjusting the payrolled amount mid-year.
A word on timing
April 2027 sounds a long way off. It is not. If you factor in the time needed to audit benefits, update payroll systems, communicate with employees, and register with HMRC, the preparation window is shorter than it looks. Businesses that start working through this now — during the 2026/27 tax year — will find the transition far more manageable than those who leave it until early 2027.
Lucas White Payroll Services is already helping clients prepare for this change. If you want to understand what mandatory payrolling means for your specific setup, get in touch — we are happy to have a practical conversation.
