- What Are Benefits in Kind?
The Basics
Benefits in kind are perks you give your employees for free or at a discount. Common examples include company cars, private health insurance, or gym memberships. Right now, you report these benefits once a year using a form called P11D. HMRC then adjusts each employee’s tax code, which can lead to unexpected tax bills for your workers.
What’s Changing
From April 2027, you must report benefits through your regular payroll instead of filling out P11D forms at year-end. This means tax on benefits gets taken out of each payslip throughout the year, just like regular income tax.
- The Big Change Coming in 2027
Current System: Annual Reporting
Today, you gather all benefit information at the end of the tax year and submit P11D forms to HMRC. Your employees then get adjusted tax codes, sometimes months later, which can create surprise tax bills.
New System: Payroll Integration (Mandatory April 2027)
Starting April 2027, you must include benefits in your regular payroll. Tax on benefits gets deducted from each payslip automatically. For most employers, P11D forms will no longer be needed.
Important to Know
You can start payrolling benefits voluntarily right now. This gives you time to get comfortable with the new system before it becomes mandatory. Many employers are making the switch early to avoid a last-minute rush in 2027.
- Why Is This Change Happening?
Problems with the Current System
The annual P11D system creates headaches for everyone. Employers spend hours compiling benefit data at year-end and face penalties if forms are late. Employees get shocked by unexpected tax bills they didn’t budget for. HMRC staff get overwhelmed reviewing thousands of forms in a short time frame, which leads to delays and errors.
How Real-Time Reporting Solves These Problems
When you payroll benefits, tax gets collected gradually throughout the year. Employees see exactly what’s being deducted on each payslip, so there are no surprises. Your year-end workload decreases dramatically. HMRC processes information continuously instead of in one big rush. Everyone benefits from a smoother, more transparent system.
- Which Benefits Can Be Payrolled?
Benefits You Can Payroll Now
Most common workplace benefits can be processed through payroll, including:
- Company vehicles (cars, vans)
- Fuel allowances for company vehicles
- Private medical insurance
- Gym memberships
- Professional fees and subscriptions (like membership in industry organisations)
Benefits You Cannot Payroll Yet
Two types of benefits still require traditional P11D reporting:
- Living accommodations (employer-provided housing)
- Beneficial loans (low-interest or interest-free loans to employees)
Coming in 2026-2027
From November 2026, you’ll have the option to voluntarily register for payrolling living accommodations and beneficial loans. While this is not mandatory, it allows you to report all employee benefits through a single payroll process.
Note: Voluntary payrolling of loans and accommodation will be available for registration starting in November 2026, with implementation beginning in the 2027-2028 tax year (from April 2027).
- Benefits of Switching to Payrolling
Less Year-End Paperwork
Preparing P11D forms takes time and effort. Once you payroll benefits, you eliminate most of this work. You only need P11D forms if you provide living accommodation or beneficial loans that you choose not to payroll.
Employees Can Plan Better
When tax on benefits comes out gradually through the year, employees aren’t hit with large, unexpected bills. They see deductions on each payslip and can manage their budgets accordingly. This reduces stress and financial surprises for your workforce.
Fewer Mistakes and Penalties
Integrating benefits into your regular payroll process reduces errors. You’re less likely to miss deadlines or submit incorrect information, which means fewer penalties and corrections.
More Accurate Tax Codes
Under the old system, benefit values might not be reflected in tax codes until months after the tax year ends. With payrolling, HMRC assigns the correct tax code from day one, so employees pay the right amount of tax from their first payslip.
- How Payrolling Actually Works
Step 1: Register with HMRC
Before you can start payrolling benefits, you must register on the HMRC website before the tax year begins. Tell HMRC which benefits you plan to payroll and which employees receive them. HMRC will then issue updated tax codes for those employees.
- Important: You only need to register for the 2026/27 tax year. From 2027/28 onwards, when payrolling becomes mandatory, registration will no longer be required.
- Important Timing Rule: If you register after the tax year has started, payrolling won’t begin until the following tax year. Plan ahead.
Step 2: Use Approved Payroll Software
You need HMRC-approved software that can handle benefits in kind. Your system must calculate benefit values correctly and apply the right tax deductions.
Step 3: Add Benefits to Each Payroll Run
For each pay period, enter the value of benefits for employees who receive them. If you don’t know the exact value, you can use a reasonable estimate. The software calculates the tax and deducts it evenly across the year.
Step 4: Pay HMRC in Real-Time
Tax on benefits goes to HMRC with each payroll submission, just like regular employment taxes. This real-time payment means employees are unlikely to owe additional tax at year-end.
What About P11D Forms?
For most employers, P11D forms disappear completely. You only need them if you provide benefits that can’t be paid for (like living accommodations) or if you choose not to payroll benefits for certain employees.
- Steps to Prepare Your Business
Action 1: Review Your Current Benefits
Make a complete list of all perks you offer employees. Identify which ones count as benefits in kind according to HMRC rules. Generally, this includes anything employees get for free or at a discount that is taxable value.
Action 2: Calculate Benefit Values
Figure out the annual value of each benefit for each employee. For example, if you provide a company car, you need to know its taxable value. If you’re unsure of exact amounts, HMRC accepts reasonable estimates.
Action 3: Choose Your Payroll System
Make sure your payroll software is HMRC-approved for benefits reporting. If your current system doesn’t support this, you’ll need to upgrade or switch providers. Alternatively, consider using a professional payroll service that handles everything for you.
Action 4: Register Before the Deadline
If you want to start payrolling voluntarily before April 2027, register by April 5, 2026. After that date, voluntary registration closes because the system becomes mandatory anyway. To payroll beneficial loans or living accommodations, register between November 2026 and April 2027.
Action 5: Communicate with Employees
HMRC requires you to tell employees in writing when you start payrolling their benefits. Send notifications by email, letter, or on payslip no later than June 1 after the tax year ends. Your message should explain:
- Which benefits are being payrolled and their values
- How this affects their tax code and take-home pay
- That tax on benefits will be deducted from future payslip
- That they’ll receive a year-end statement showing total benefit values
What Employees Need to Understand
Be clear with your staff that their take-home pay might look smaller even though their total compensation hasn’t changed. Previously, they paid tax on benefits later through their tax code. Now they’re paying as they go, which is better for avoiding surprises, but payslip may appear reduced.
- Timeline of HMRC Changes: Payrolling Benefits
HMRC continues to refine its payrolling benefits policy. Keep these dates in mind as you plan for upcoming changes to your payroll and tax reporting processes.
| Date | Activity |
|---|---|
| April 2026 | Voluntary registration for payrolling benefits for the 2026 tax year closes |
| July 2026 | Publication of updated legislation and guidance on payrolling benefits |
| Late 2026 | Submission of legislation to parliament |
| November 2026 | Voluntary registration for payrolling of beneficial loans and living accommodations opens |
| April 2027 | Mandatory payrolling of benefits begins |
| April 2027 | Voluntary registration for payrolling of beneficial loans and living accommodations closes |
Payroll Your Benefits with Prager Metis
Payrolling benefits becomes mandatory in 2027, but by adopting the new system now, you can stay ahead of compliance requirements. Prager Metis can assist you with the registration and filing of payroll benefits for your organisation.
To get started, we simply require a list of your current employee benefits and any premiums you pay. Using the data, our team will calculate the cash equivalent of the benefits and assist you with migrating from P11D forms to payroll. Contact us today to schedule an appointment with our team.
