The landscape of benefits administration is set to change significantly. From April 2027, (it was to be April 2026 but the date when all employers were to comply was postponed until April 2027) the government will make payrolling of benefits in kind mandatory for all employers.
This represents a fundamental shift in how employers report and tax employee benefits, moving away from the traditional P11D system that has been in place for decades.
At Ascend Payroll, we’re here to help you understand what this change means for your business and how you can prepare effectively over the next 15 months.
What is payrolling of benefits?
Payrolling benefits means reporting taxable benefits through your payroll in real-time, rather than completing P11D forms after the end of the tax year. When you payroll a benefit, you add its cash equivalent value to an employee’s pay for tax purposes. Employees pay tax on the benefit through PAYE each pay period, making their tax obligations more transparent and evenly spread throughout the year.
Currently, this approach is voluntary. Many forward-thinking employers have already adopted payrolling for benefits like company cars and private medical insurance. From April 2027, it becomes compulsory for all employers offering taxable benefits.
Why the change?
The move to mandatory payrolling aligns with HMRC’s broader Real Time Information (RTI) strategy. The government aims to simplify tax administration, reduce end-of-year surprises for employees, and improve tax collection efficiency. By processing benefits through payroll, tax is collected as benefits are received rather than being reconciled months later through adjusted tax codes or unexpected tax bills.
For HMRC, this provides better visibility and reduces the administrative burden of processing millions of P11D forms annually. For employers and employees, it promises greater transparency and accuracy.
What this means for employers
The shift to compulsory payrolling requires preparation across several areas of your business:
Systems and software
Your payroll software must be capable of handling benefit calculations and reporting them correctly through RTI. Most modern payroll systems already support voluntary payrolling, but you’ll need to ensure yours is fully compliant with the mandatory requirements by April 2027. This may require updates or, in some cases, migration to a new platform. Of course, here at Ascend Payroll we are all over this, and our systems are fully compliant and ready.
Data collection and valuation
You’ll need robust processes for collecting information about benefits provided to employees and calculating their cash equivalent values. This includes company cars, fuel benefits, private medical insurance, gym memberships, and other taxable perks. Accurate benefit valuation is crucial to ensure employees pay the
correct amount of tax.
Process changes
Your payroll cycle will need to incorporate benefit data each period. This means closer coordination between HR, fleet management, benefits administrators, and payroll teams. Information about new benefits, changes to existing benefits, or cessation of benefits must flow to payroll promptly.
Employee communication
Clear communication will be essential. Employees need to understand why their payslips are changing, what the benefit values represent, and how this affects their take-home pay. Many employees may be unfamiliar with seeing benefits itemised on their payslips.
What employers can do now
While April 2027 may seem distant, preparation should begin now. Here’s what we recommend:
Register for voluntary payrolling
Consider adopting voluntary payrolling for the 2026/27 tax year as a trial run. This gives you a full year to identify and resolve issues before it becomes mandatory. You must register with HMRC by April 5, 2026, if you want to payroll benefits from April 6, 2026.
Audit your benefits
Conduct a comprehensive review of all benefits you provide. Create a complete inventory including company cars, fuel, medical insurance, gym memberships, beneficial loans, accommodation, and any other perks. Understanding the full scope now prevents surprises later.
Review your systems
Assess whether your current payroll software can handle benefit payrolling effectively. If upgrades are needed, factor in implementation time and testing periods. Don’t leave this until 2027.
Train your team
Ensure your payroll team understands benefit valuation rules and your HR team knows what information payroll needs. Cross-functional training helps create seamless processes.
Develop communication materials
Start preparing employee communications now. FAQs, guides, and example payslips can help employees understand the changes before they see them reflected in their pay.
Consider professional support
Payrolling benefits correctly requires expertise in both payroll and benefits taxation. Working with specialists ensures compliance and can save significant time and stress. We at Ascend are fully conversant with payrolling of benefits and ready to help.
What this means for employees and payslips
For employees, the most noticeable change will appear on their payslips. Where previously they may have been unaware of the tax they owed on benefits until their tax code changed, they’ll now see benefits listed as separate items each pay period.
Payslip changes
Employees will see new lines on their payslips showing each taxable benefit and its cash equivalent value. For example, if an employee has a company car valued at £5,000 annually for tax purposes, they might see approximately £416.67 added to their taxable pay each month. This amount isn’t cash they receive but represents the taxable value of the benefit.
Tax deductions
Tax on benefits will be deducted in real-time through PAYE, spread evenly across the year. This means employees won’t face unexpected tax bills or adjusted tax codes later. Their take-home pay won’t change compared to the old system, but the visibility into how their tax is calculated will improve significantly.
Take-home pay clarity
While the gross pay figure on payslips will appear higher, for income tax purposes, due to the added benefit values, take-home pay remains the same. Employees need to understand this distinction to avoid confusion. The benefit values are notional additions for tax calculation purposes only. HMRC will no longer include a car benefit (in this example) in the employee’s notice of coding.
National Insurance
It’s important to note that employees don’t pay National Insurance on benefits in kind. Only the income tax changes. This means the benefit value is added for income tax purposes but not for NI calculations, which can initially seem confusing on payslips.
Year-round consistency
One significant advantage for employees is more predictable monthly deductions. Under the P11D system, employees sometimes received large tax bills or had their tax codes adjusted mid-year, creating cashflow challenges. Payrolling eliminates these surprises.
The transitional year consideration
It’s worth noting that when employers first begin payrolling benefits, there can be a transitional year where employees may be taxed twice on the same benefit if their tax code hasn’t been updated. This occurs because HMRC may not immediately adjust an employee’s tax code to remove the benefit value that’s now being taxed through payroll.
Employers should be vigilant during the 2027/28 tax year to check employee tax codes and contact HMRC to request adjustments where necessary.
Employees who notice their tax code still includes a benefit that’s now appearing on their payslip should inform their payroll department immediately. This transitional issue typically resolves itself by the following tax year, but proactive management can prevent employees from overpaying tax that would later need to be reclaimed.
Looking ahead
The mandatory payrolling of benefits represents a significant modernisation of the tax system. While the transition requires effort, the long-term benefits include simpler administration, greater transparency, and improved accuracy for both employers and employees.
At Ascend Payroll, we’re committed to supporting our clients through this transition. We’re already working with businesses to implement voluntary payrolling and develop strategies for full compliance by April 2027.
The key to success is early preparation. Businesses that start now will have time to refine their processes, train their teams, and communicate effectively with employees. Those who wait until 2027 may face rushed implementations and avoidable complications.
If you have questions about payrolling benefits or need support preparing for the 2027 changes, our team is here to help. Contact us today to discuss how we can ensure your payroll is ready for the future.
