To save on end of year paperwork, many employers choose to ‘payroll’ their benefits in kind instead of reporting them on the Form P11D for each employee or director. 

This has been an option for most benefits in kind (except loans and living accommodation) since April 2016, but employers can still choose which option suits them best. This will all change from April 2027, when mandatory payrolling of benefits will be introduced and will replace Form P11D.

Where employers payroll benefits, the tax on employee benefits is collected via the payroll by adding the cash equivalent of the benefit to the employee’s salary on their payslip. This can reduce the risk of tax overpayments/underpayments as employees pay the tax on their benefits in real time, rather than paying tax on the amount in their PAYE coding notice (which is often incorrect, as it is estimated based on prior year information). At the moment, it is possible for employers to choose which benefits to payroll and which employees to include, and they complete Forms P11D for those benefits/employees that are not payrolled.

Employers do not need to deduct Class 1 National Insurance provision just because they are payrolling benefits. Class 1A National Insurance is still dealt with at the end of the year via Form P11D(b). There are cases where Class 1 National Insurance rather than Class 1A National Insurance applies (such as where the employer provides ‘money’s worth’ or has paid an employee’s debt or liability), and that is the case even where the benefit is declared on Form P11D.

Payrolling benefits in the 2026/27 tax year 

Although the new mandatory scheme is expected to bring in more detailed reporting to HMRC, employers may find it useful to sign up for voluntary payrolling in the 2026/27 tax year to help them prepare for when they will be required to payroll their benefits from April 2027.

The first step is for the employer to speak with their payroll provider to find out how payrolling of benefits will work with their software. The employer should then let HMRC know that they wish to payroll benefits by registering with the payroll benefits and expenses online service.  To payroll benefits in the 2026/27 tax year, employers need to apply before 5 April 2026. . 

Once HMRC has processed the application, their systems will identify the employees who have benefits being payrolled and remove the benefit from their PAYE coding notice to make sure that tax is not charged twice on the same benefit.

Notifying employees

Where an employer decides to payroll benefits, they must let their employees know in writing that they have done so before 1 June after the end of each tax year.

The letter to the employee must include:

• an explanation that they will not be taxed twice because their employer has registered to payroll their benefits;
• details of the benefits being payrolled and their cash equivalent;
• details of any amounts payrolled for optional remuneration (if any); and
• details of any benefits the employer has not payrolled.

The employer needs to tell their employee in the first year of payrolling how this will affect their PAYE coding notice. They also need to let them know how the payrolling process will work, in that the employer will add the cash equivalent of the benefit in kind to their taxable salary and will tell them how much benefit was payrolled at the end of the year.

Mandatory payrolling from April 2027

The government has published guidance on how to get ready for mandatory payrolling of benefits from April 2027, although some of the key details are still being finalised. What is known is that additional information will be needed in the RTI submissions to HMRC. 

We will publish more details on the differences between the voluntary and mandatory payroll benefits schemes on the ATT website once known in the coming months.

This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.   

We regularly publish articles on a range of tax and wider topical issues which affect employers. If you wish to subscribe to our monthly Employer Focus e-newsletter, please contact us.