When HMRC says benefits in kind will be payrolled from April 2027, the concept sounds straightforward enough. Tax is collected through payroll rather than through a P11D. But when employers start asking how that works in practice, month by month, benefit by benefit, the details matter. And buried in that detail is a cash flow issue that most businesses have not yet spotted.
The basic calculation
The starting point is the annual cash equivalent value of the benefit. This is the same figure you currently report on a P11D – a company car’s P11D value multiplied by its CO2 percentage, or the annual premium cost of private medical insurance.
Under payrolling of benefits, that annual figure is divided by the number of pay periods in the year.
For a monthly-paid employee, divide by twelve. For a weekly-paid employee, divide by fifty-two. That amount is then added to the employee’s payroll each period and taxed alongside their salary.
A worked example
Sarah has a company car with a P11D value of £28,000 and a CO2 emissions percentage of 25%.
Her annual cash equivalent value is £28,000 × 25% = £7,000.
Divided across twelve monthly pay periods, that is £583.33 per month added to her taxable pay.
At the basic rate of 20%, Sarah pays £116.67 in income tax on her benefit each month – deducted from her pay, rather than collected through a code adjustment later.
Her employer pays Class 1A National Insurance at 15% on the same £583.33 – that is £87.50 per month, reported on the Full Payment Submission alongside Sarah’s normal salary.
When you do not know the value at the start of the year
Some benefits are straightforward to value in advance. Others are less predictable. Where the exact value is not known at the outset, HMRC allows employers to use a reasonable estimate and adjust it as the year progresses. If the value changes mid-year, for example, if the employee switches to a different car, the remaining months are recalculated accordingly.
HMRC is also considering a ‘month 13’ correction mechanism for benefits where the precise figure cannot be confirmed until after the year ends. This would allow a final adjustment in the first pay period of the new tax year rather than requiring an amended submission.
What employees will see
Under mandatory payrolling, employees will see a benefit in kind line on their payslip each month alongside the associated tax deduction. Their tax code will not include an adjustment for that benefit – HMRC will automatically remove payrolled benefits from tax codes once mandatory payrolling goes live.
This is cleaner and more transparent than the current system. But it will generate questions in the early months, particularly from employees who are used to seeing their benefits handled invisibly through a code adjustment.
Getting a clear explanation to your workforce before April 2027 is one of the most practical things an employer can do right now.
The cash flow problem most employers haven’t spotted
Most of the conversation around mandatory payrolling focuses on the reporting change. But there is a second issue sitting quietly in the detail – one that has the potential to cause real financial disruption in the 2027/28 tax year.
Currently, employers pay Class 1A National Insurance on all benefits in kind in a single annual payment, due by 22 July following the end of the tax year. For many businesses, this is a substantial sum, potentially tens of thousands of pounds, but it is planned for as a known annual outgoing.
Under mandatory payrolling, Class 1A NIC is expected to move to real-time, paid alongside each FPS submission and spread across twelve monthly payments. HMRC has not yet issued formal confirmation, but it is the direction of travel.
But the problem occurs because it’s a transition time from the old system to the new. In 2027/28, many employers will face both payments simultaneously.
- The 2026/27 Class 1A NIC, calculated under the old system, is still due by 22 July 2027.
- At the same time, real-time Class 1A payments on 2027/28 benefits begin from April 2027.
- That means paying Class 1A on current-year benefits in April, May, June, and July at exactly the same time as settling the prior-year lump sum.
It is not a penalty or error; it is a structural consequence of the transition, but it is a cash flow pressure that will catch businesses out if they have not planned for it.
The most straightforward action is to model your expected 2026/27 Class 1A liability now, then model what real-time payments on the same benefit package would look like monthly. Add the two together across the April–July 2027 window, and you have your exposure. If the figure is manageable, you have peace of mind. If it is larger than expected, you have time to plan.
If you would like support working through the numbers for your business, the Ascend team is here to help.
