From 6 April 2027, payrolling benefits in kind will stop being a choice and become the default for most employers. If you’ve relied on the P11D process for years, the bigger question isn’t why this is happening. It’s how the new system actually works.
From annual form to monthly calculation
The P11D approach reports the value of a benefit once a year, after the tax year ends. Employees then see the tax collected later, usually through an adjustment to their tax code.
Payrolling benefits removes that lag.
The annual cash equivalent value of a benefit is divided across the number of pay periods in the year, and that portion is taxed through payroll each time the employee is paid. For someone paid monthly, that means the annual value is divided by 12.
The benefit value itself doesn’t change. What changes is when and how the tax on it is collected.
A worked example
Take a company car with a P11D value of £28,000 and a benefit percentage of 25%.
- Annual cash equivalent value: £28,000 × 25% = £7,000
- Monthly taxable benefit: £7,000 ÷ 12 = £583.33
- Monthly income tax at basic rate: £583.33 × 20% = £116.67 deducted from pay
- Monthly employer Class 1A NIC at 15%: £583.33 × 15% = £87.50 paid by the employer
That figure is reported on the monthly Full Payment Submission, the same RTI submission already used for salary. If the benefit changes mid-year, for example, an employee switches cars, the value is adjusted and the remaining months are recalculated. Errors within the same tax year can be corrected by spreading the adjustment across the pay periods that remain.
It’s arriving in two phases, not one
This is the point that’s shifted since the original guidance came out. Rather than moving almost all benefits into mandatory payrolling in one go, in June, HMRC confirmed a two-phase rollout, giving employers and software providers more time to build and test the systems involved.
Phase 1, from 6 April 2027, covers:
- Company cars and car fuel
- Vans and van fuel
- Private medical and dental insurance and other employer-provided medical benefits
These are the most commonly provided benefits, and reportedly the most straightforward to calculate, which is presumably why they’re first through the door.
Phase 2, from 6 April 2028, brings in most of the rest, including:
- Non-cash vouchers and credit cards
- Living expenses paid by the employer
- Gym memberships and sports facilities
- Assets transferred to employees
- Most other remaining P11D benefits
Loans and living accommodation stay outside the mandatory regime in both phases. Voluntary payrolling of these two remains possible, but employers who want to go down that route still need to register with HMRC. HMRC has said a timeline for eventually mandating them will follow, but hasn’t set a date.
What this means in practice is that many employers will be running two reporting systems side by side for at least a year. Phase 1 benefits go through payroll from April 2027. Everything else, aside from loans and accommodation, stays on the P11D until April 2028, unless you choose to payroll it voluntarily sooner.
If your benefits package includes items from both phases, it’s worth deciding now whether to stagger the transition in line with HMRC’s timetable or move everything across voluntarily in one go to avoid running parallel processes.
The Class 1A NIC shift
This is where the mechanics get more complicated than a simple divide-by-12 calculation.
Currently, employer Class 1A NIC on benefits is paid as a single annual sum by 22 July following the end of the tax year. Under the new system, it looks set to move to real-time, paid alongside each FPS submission rather than as one lump sum. HMRC has not yet formally confirmed this point, but it’s the direction of
travel.
Spreading the liability across the year is, in principle, easier on cash flow. But it creates a genuine pinch point in the 2027/28 transition year. Employers will be paying the 2026/27 Class 1A NIC as a lump sum in July 2027, under the old rules, at the same time as they start paying Class 1A in real time for
2027/28 benefits from April 2027. Two liabilities, running concurrently in the same financial year.
Anyone building forecasts for 2027/28 needs this double payment built in now.
What HMRC will and won’t do automatically
Once mandatory payrolling is live, HMRC will remove payrolled benefits from employees’ tax codes automatically, so there’s no risk of double taxation between the two systems. Employees will instead see a benefits in kind value and its associated tax deduction on their payslip each month.
What HMRC won’t do is chase down your benefit data for you. Payrolling depends on knowing, or accurately estimating, the value of each benefit in real time, or at least at the start of the tax year, with adjustments made as things change. That’s a different data process from producing one figure annually for a
P11D, and it needs to be built before April 2027, not discovered in the middle of it.
There is some room for error in year one. HMRC has said it will take a soft touch approach to reporting inaccuracies in 2027/28, provided the non-compliance isn’t deliberate, and has indicated a possible “month 13” mechanism for correcting benefits where the exact value wasn’t known during the year. Late filing and payment penalties still apply throughout, though, and that leniency isn’t expected to survive into 2028/29.
Where the complexity comes in
The mechanics aren’t complicated in isolation – divide the annual value, tax it each period, and report it on the FPS. The complexity comes from doing this correctly for every employee, every benefit type, and every mid-year change, while managing a Class 1A NIC transition that hits cash flow twice in one year, and potentially running two reporting systems in parallel across the two phases.
Getting the data collection process right now, well before April 2027, is what makes the calculation itself straightforward when each deadline arrives.
