HMRC announce phased implementation of mandatory payrolling of benefits in kind

Since April 2016, employers have had the option to payroll most benefits in kind (except loans and living accommodation). 

By payrolling benefits, the employer can collect the tax due on benefits in kind in real time via the payroll by adding the cash equivalent of the benefit to the employee’s salary on their payslip. This is instead of the benefit being reported on the employee's Form P11D and the employee paying tax on the amount in their PAYE coding notice, which is often incorrect as it is estimated based on prior year information.

HMRC planned to move to a system of mandatory payrolling of all benefits in kind from April 2027, a year later than the previously announced date of April 2026. 

Whilst payrolling benefits may have advantages in terms of the correct tax being collected in real time, there have been concerns about the practical challenges that need to be overcome by employers and software developers in order to deliver payrolling for all benefits. This includes the need to meet HMRC's announced Real Time Information (RTI) technical specifications and the ability of employers to obtain information from benefit providers ahead of each payroll run, instead of only being required once per year for Forms P11D.

After dialogue with the ATT, other professional bodies and the software industry, HMRC have announced that there will be a phased implementation of mandatory payrolling of benefits in kind. Further updates to the interim guidance on mandatory payrolling, which was originally published alongside the 2025 Autumn Budget, are expected in the coming weeks.

Mandatory payrolling will now only be required from April 2027 for company cars and fuel, vans and van fuel, private medical insurance and other employer provided medical benefits, which are the most popular benefits (believed to be approximately 92% of all benefits provided in the UK). Other benefits can continue to be reported on Forms P11D, although employers can payroll these on a voluntary basis during the 2027/28 tax year. 

Mandatory payrolling of the remaining benefits in kind (with the exception of loans and living accommodation) will be required from April 2028, allowing HMRC the opportunity to consult with the software industry and other key stakeholders about the RTI technical specifications and how they will apply. The mandatory payrolling of loans and living accommodation benefits will not happen until a later date, the details of which are still to be confirmed by the government.

Part of the phased implementation will also see a reduction in the data fields required from April 2027, with only 32 data fields being required for RTI submissions instead of the original 126 data fields. The government has stated that 14 of those data fields are already in place for RTI (in respect of cars) so software developers will only need to build 18 fields ahead of April 2027. 

The phased approach, alongside the reduced initial data field requirement for RTI submissions, is a welcome step, as it will significantly ease the burden for employers in changing their systems compared with what would have been required for mandatory payrolling for all benefits taking place from April 2027. As well as being the most popular benefits provided, those benefits which are included from April 2027 are likely to be the most straight forward in terms of the information being required. 

An additional year to prepare for the remaining benefits will help ensure that HMRC can refine the technical specifications and reduce the probability of RTI submissions being rejected, which in a worse case scenario could affect an employee's entitlement to Universal Credit. Employers who do not wish to wait until April 2028 can however payroll the remaining benefits on a voluntary basis, although the information required in the 2027/28 tax year may be more limited than the full requirements from April 2028.

Similar to other tax changes such as Making Tax Digital, HMRC have also indicated that there will be a relaxed approach to penalties, so employers will not be penalised for getting something wrong as they change their systems to accommodate mandatory payrolling of benefits.

The ATT will continue to have dialogue with HMRC in the coming months ahead of the phased implementation of mandatory payrolling of benefits in kind. We would be interested to hear any feedback from employers, agents and payroll providers about their preparations - please email [email protected] with any comments or concerns.