HM Revenue & Customs (HMRC) is introducing mandatory payrolling of Benefits in Kind (BiKs) and taxable expenses, but the change will now be phased in from 6 April 2027 rather than applying to all benefits immediately.
For many employers, this still represents one of the biggest changes to payroll reporting in recent years.
Instead of reporting benefits once a year using P11Ds, employers will need to tax them in real time through employees’ pay. This means Income Tax and National Insurance will be deducted automatically, just like salary.
The phased approach gives businesses more time to prepare, but significant updates to payroll systems, processes and benefit data will still be required. Employers providing taxable benefits should begin planning now to avoid disruption.
A shift away from P11Ds
Under the new rules, the familiar end-of-year P11D process will largely disappear. The reporting process for BiKs and expenses will be through the Full Payment Submission (FPS). This is the same process employers currently use to report salary and other details to HMRC when payments are made to employees.
In practical terms, this means:
- Employees will pay tax on benefits as they receive them, not later via tax code adjustments;
- Employers will report benefits alongside pay through their regular payroll submissions; and
- Class 1A National Insurance will also be paid during the year, rather than after year end.
While this may ultimately simplify reporting, it introduces new demands on systems, processes and data accuracy.
How will the changes be phased?
The mandatory payrolling rules will be introduced in stages.
From 6 April 2027 – Phase 1
Mandatory payrolling will apply to certain benefits, including:
- Company cars;
- Car fuel;
- Vans;
- Van fuel; and
- Employer-provided medical benefits.
From 6 April 2028 – Phase 2
Most other BiKs will move into the mandatory payrolling regime.
This phased approach is intended to support a smoother transition for employers and allow businesses, payroll providers and software developers time to adapt.
Who will be affected?
Any employer providing taxable benefits will need to consider how the changes affect them.
Employers offering benefits such as company cars, medical insurance and other taxable perks will need to ensure their payroll processes can support real-time reporting as the relevant benefits come into scope.
What is changing in practice?
As benefits move into mandatory payrolling:
- The value of benefits will need to be spread across pay periods and included in payroll;
- Payslips will show the taxable value of benefits alongside earnings; and
- Tax and National Insurance will be deducted in real time.
Where benefit values are not known upfront, employers will need to estimate and adjust as needed during the year. This will add a new layer of complexity to payroll administration.
Are any benefits excluded?
Yes – at least for now. The following are not yet included in the mandatory regime:
- Employer-provided living accommodation; and
- Employment-related loans.
These will remain voluntary and are not included in the mandatory phases currently planned. Employers will also have the option to payroll these voluntarily from November 2026.
What does this mean for your business?
Although the changes are being introduced gradually, employers should not underestimate the operational impact.
Moving to real-time taxation of benefits will require:
- Updates to payroll software and systems;
- More detailed and timely data on employee benefits;
- Clear communication with employees about changes to their net pay; and
- Careful cash flow planning, particularly with earlier National Insurance payments.
What should you do now?
Early preparation will make all the difference. Over the next year, employers should:
- Review all benefits currently provided to employees;
- Assess whether payroll systems are ready for real-time benefit reporting;
- Update internal processes to capture benefit changes as they happen; and
- Consider seeking specialist payroll advice.
The move to mandatory payrolling is designed to modernise the tax system, but for employers, it is a significant operational change. Those who start preparing early will be best placed to manage the transition smoothly and avoid implementation challenges when the new rules take effect.
Further guidance
Mandatory payrolling remains an evolving area, with HMRC confirming that further technical guidance will be published by July 2026. Final guidance for phase one is expected alongside the Autumn Budget 2026 following ongoing consultation with stakeholders and industry representatives.
How M+A Partners can help
We are experienced in supporting employers with the process of taxing employees’ benefits and expenses through payroll. Whether you need advice on preparing for the phased introduction of mandatory payrolling, registering for payrolling benefits and expenses with HMRC, or understanding how the changes may affect your organisation, our team can help.
For more detailed information on the changes, including what employers need to consider and how to prepare, please download our factsheet below.
If you have any queries, please get in touch with your usual M+A Partners contact or one of our experts.
Mandatory Payrolling for Benefits in Kind (BiKs)