Mandatory Payrolling of Benefits in Kind: A UK Guide
If you employ staff in the UK and provide them with benefits such as a company car or private medical cover, the way you report and tax those benefits is changing. HMRC is moving away from the old P11D system, where benefits were reported once a year after the tax year ended, towards real time reporting through payroll.
For overseas companies running UK payroll from a distance, this is one of those changes that’s easy to miss until it lands on your desk as an urgent deadline. It affects how your payroll provider processes each pay run, what data you need to collect from employees, and when you need to have it ready.
This guide sets out what mandatory payrolling of benefits in kind actually means, when it starts, which benefits are affected first, and what you need to do now to be ready.
What Is Mandatory Payrolling of Benefits in Kind
A benefit in kind is anything of value an employer gives an employee outside their normal salary. Company cars, private medical insurance, gym memberships and interest-free loans are all common examples. Because these carry a monetary value, HMRC treats them as taxable income and expects Income Tax and Class 1A National Insurance to be paid on them.
Historically, employers reported these benefits once a year on a P11D form, submitted after the tax year ended on 5 April. HMRC would then adjust the employee’s tax code the following year to collect what was owed, often months after the benefit was actually provided.
Payrolling changes this. Instead of reporting after the fact, the employer works out the annual cash value of each benefit, divides it by the number of pay periods in the year, and adds that amount to the employee’s taxable pay each time they’re paid. The tax is collected in real time through the normal payroll run, using the same Full Payment Submission process already used for salary.
Payrolling itself isn’t new. Employers have been able to do it voluntarily since 2016. What’s changing is that HMRC is making it compulsory, starting with the benefits most employers provide.
Why It Matters for Overseas Companies
If you’re running a UK entity from Australia, the US, Canada, New Zealand or South Africa, your local payroll provider is likely already managing PAYE, National Insurance and statutory payments https://www.paulbeare.com/payroll-services-uk/Â on your behalf. This change adds a new layer to that process, and it’s easy for it to get lost in the noise if you’re not the one running payroll day to day.
Get the transition wrong and the risks are practical, not abstract. Employees can end up taxed twice on the same benefit if HMRC’s tax code adjustments aren’t removed at the right time. Registration has a hard cut-off, if you want to payroll a new benefit for a tax year, you need to be registered before that tax year starts, HMRC does not accept in-year requests. Miss it, and you’re stuck reporting that benefit the old way for another twelve months.
There’s also a genuine advantage if you get ahead of it. Employees see the tax impact of their benefits in their normal payslip, which usually means fewer of the year-end surprises that can undermine trust in an employer, particularly with employees who are new to the UK tax system and already navigating enough that’s unfamiliar.
How It Works in the UK
Mandatory payrolling was originally due to start in April 2026. HMRC pushed that back, and in June 2026 confirmed a phased rollout instead of a single start date for every benefit.
Phase 1 begins on 6 April 2027 and covers the benefits most employers provide. Phase 2 follows on 6 April 2028 and brings in most of what’s left, though loans and living accommodation stay outside mandatory payrolling for now and can only be payrolled voluntarily.
For the 2026/27 and 2027/28 tax years, if you’re not payrolling a benefit voluntarily, you’ll still file a P11D for it in the normal way. Once a benefit moves into mandatory payrolling, you stop filing individual P11Ds for it, but you still need to submit a P11D(b) each year to account for the Class 1A National Insurance due on the benefits you’ve provided, and that’s due by 6 July, with the National Insurance payment due by 22 July.
HMRC has also said it will automatically remove payrolled benefits from affected employees’ tax codes ahead of the April 2027 start date, which should reduce the risk of a benefit being taxed twice, once through the old code and once through payroll.
Key Compliance Requirements
Three things matter most for overseas employers preparing for this change. First, registration timing. If you want to payroll a benefit for a given tax year, you must register with HMRC before that tax year begins. There’s no facility to start mid-year, so missing the deadline means another full year of P11D reporting for that benefit.
Second, employee notification. Employers must tell employees which benefits are being payrolled and their value, by 1 June following the end of each tax year. This matters more than it might sound, since employees new to the UK, unfamiliar with how P11Ds and tax codes work, often need this explained clearly rather than left as a line item they don’t recognise.
Third, the P11D(b) doesn’t disappear. Even once every benefit you provide is payrolled, you still need to file a P11D(b) annually to report and pay Class 1A National Insurance. Payrolling changes how Income Tax is collected, it doesn’t remove the National Insurance reporting obligation.
If your UK entity provides company cars through a salary sacrifice or Optional Remuneration Arrangement, it’s worth flagging specifically, these are included within the Phase 1 mandate in the same way as conventionally provided vehicles, and HMRC has confirmed they’re not treated as an exception.
Common Mistakes International Businesses Make
The most common mistake is assuming this sits entirely with your UK payroll provider and doesn’t need input from head office. Payroll can run the mechanics, but decisions about which benefits to payroll, when to register, and how to communicate the change to employees usually need sign-off from whoever manages the UK entity, and that person is often based overseas and several time zones removed from the detail.
A second mistake is treating the 2026/27 tax year as a quiet period before the real change lands in 2027. It isn’t. If you registered to payroll benefits voluntarily before 5 April 2026, you’re already operating under the new process. If you didn’t, 2026/27 is your last full P11D cycle for most benefits, with the P11D(b) due by 6 July 2027, which lands right as Phase 1 mandatory payrolling begins. The two deadlines overlap, and getting caught unprepared for both at once creates unnecessary pressure on a small UK finance function.
A third is underestimating the payroll software and process changes needed. Payrolling benefits requires additional data on each Full Payment Submission, and if your provider hasn’t reviewed their systems and internal processes, particularly around how benefit values are gathered and updated through the year rather than once annually, April 2027 arrives faster than it looks from a distance.
How Paul Beare Helps With This
Our payroll services UK https://www.paulbeare.com/payroll-services-uk/Â team manages the full payroll cycle for overseas companies, including PAYE, National Insurance, statutory payments and the administration and payment of employee benefits, so this transition is handled as part of your existing service rather than as a separate project you need to run yourself.
We register benefits with HMRC ahead of the relevant deadlines, calculate and report the taxable value through payroll correctly from day one, and make sure employee notifications go out on time and in a way that makes sense to staff who may be new to how UK payroll and benefits reporting works. If your business also needs support with hiring employees in the UK https://www.paulbeare.com/hiring-employees-in-the-uk/Â more broadly, from contracts through to benefit package design, we handle that alongside payroll so nothing falls between the two.
Common questions
Do I need to do anything before April 2027?
If you want to payroll a Phase 1 benefit from the 2027/28 tax year, you need to register with HMRC before 6 April 2027. It’s worth reviewing your current benefits now so there’s time to register correctly and update your payroll data collection ahead of that date.
Will my employees be taxed twice during the transition?
HMRC has said it will automatically remove payrolled benefits from affected tax codes before April 2027 to prevent this. It’s still worth checking your first few payslips under the new system closely, and flagging anything that looks off quickly.
Do I still need to file a P11D at all after April 2027?
Only for benefits that fall outside mandatory payrolling, such as loans and living accommodation, unless you choose to payroll those voluntarily too. You’ll also still need to file a P11D(b) every year for Class 1A National Insurance.
What happens to benefits that aren't in Phase 1?
They continue to be reported on a P11D as normal until Phase 2 begins in April 2028, unless you choose to start payrolling them voluntarily before then.
If your UK entity provides employees with company cars, medical cover or other benefits, now is the time to review how they’re reported and get ahead of the April 2027 deadline. Speak to our payroll services UK team https://www.paulbeare.com/contact/Â about registering benefits correctly and keeping your UK payroll compliant through the transition.
