Mandatory payrolling of benefits: what changes when annual reporting becomes part of payroll?

At first sight, mandatory payrolling appears to be a change in reporting method. Benefits currently reported after the end of the tax year will instead pass through payroll, allowing employees to pay the associated tax during the year in which they receive them.

The rules used to decide whether a benefit is taxable and calculate its value are not being replaced. Company cars, medical insurance and other benefits will still need to be identified, valued and reported.

What changes is when that work must be done.

A process that could previously be completed after the tax year will increasingly need to operate before each payroll is finalised. To understand the effect of that change, it helps to follow the information from the point at which a benefit is provided to the point at which it is reported through payroll.

A phased introduction

HMRC originally proposed bringing most benefits into mandatory payrolling at the same time. Following industry feedback, implementation will now take place in two phases.

From 6 April 2027From 6 April 2028Remaining voluntaryCompany carsMost other taxable benefits and expensesEmployment-related loansCar fuelLiving accommodationVansVan fuelEmployer-provided medical benefits

Loans and living accommodation are expected to remain outside mandatory payrolling. Employers will be able to choose to payroll them voluntarily.

HMRC is also considering whether employers should be allowed to report Class 1A National Insurance voluntarily in real time for benefits that are not included in the first phase. That point has not yet been settled.

The revised timetable reduces the number of benefits affected from April 2027, but cars, fuel, vans and medical benefits are commonly provided. Information about them may also be held outside payroll.

Some passages in HMRC’s interim guidance have not yet been fully updated to reflect the revised timetable. Where inconsistencies remain, the specific announcement on phasing is HMRC’s latest stated position.

From an annual return to a payroll calculation

Under the existing system, many benefits are reported after the end of the tax year on forms P11D and P11D(b). The employee’s tax may then be collected through an adjustment to their tax code, sometimes after the year in which the benefit was received.

Under mandatory payrolling:

1. The employer identifies and values the benefit.
2. A proportion of its annual taxable value is included in each payroll calculation.
3. The employee pays the associated Income Tax through PAYE.
4. The benefit information is reported to HMRC on the Full Payment Submission.
5. The employer’s Class 1A National Insurance is reported and paid during the year.

Employees should therefore pay the tax closer to the time at which they receive the benefit. Fewer employees should need to pay it later through an adjustment to their tax code.

For employers, the benefit information will need to be available in time for payroll.

Calculating the amount to payroll

For each benefit provided to an employee, the employer will need to:

1. calculate, or reasonably estimate, its taxable cash equivalent for the year;
2. divide that amount by the employee’s number of pay periods;
3. round the periodic amount down to two decimal places; and
4. include the resulting value in each payroll calculation.

A benefit with an annual taxable value of £2,100 would ordinarily produce a monthly payrolled amount of £175.

The employee does not receive an additional £175. It is a notional amount included in taxable pay so that Income Tax can be calculated. It is not normally additional gross pay for Class 1 National Insurance or pension purposes.

If the employee is a basic-rate taxpayer, the benefit would, viewed separately, produce an additional £35 of Income Tax for that month:

£175 × 20% = £35

The actual deduction will depend on the employee’s tax code, cumulative position and other taxable pay.

HMRC’s guidance on reporting benefits in real time contains further calculation principles and worked examples.

The payroll calculation should be relatively easy once the correct annual value is available. The employer must first make sure that payroll receives the information needed to establish that value.

Getting the information to payroll

Consider a company car changed part-way through a month.

The payroll calculation may depend on:

• the car that has been replaced;
• the date it ceased to be available;
• the replacement car;
• the date the replacement became available;
• its list price and accessories;
• its CO₂ emissions and fuel type;
• any employee capital contribution;
• any payment for private use; and
• whether private fuel is also provided.

That information may be held by a fleet provider, finance team, HR department or the manager who authorised the change. Payroll cannot report the revised benefit until it receives the details.

The same issue arises when:

• an employee joins or leaves a medical insurance scheme;
• an insurer revises the cost of cover;
• private fuel is provided or withdrawn;
• a van becomes available for private use;
• an employee joins or leaves during the year; or
• the circumstances determining whether a benefit is taxable change.

Under an annual P11D process, missing information could often be investigated after the tax year. Mandatory payrolling requires the information for the relevant payroll run, although late information may need to be corrected later.

Benefits information will therefore need to move through the organisation more quickly than it may do now.

What if the value changes?

Not every benefit can be valued accurately at the beginning of the year. Even where the initial value is correct, the benefit or the employee’s circumstances may change.

HMRC’s proposed approach is to recalculate the annual taxable value and adjust the amount reported over the rest of the year:

Revised annual taxable value − amount already payrolled = balance remaining

The balance is then spread across the remaining payroll periods.

Suppose £1,200 has already been payrolled when new information increases the annual taxable value to £2,800. The remaining £1,600 would be divided across the payroll periods left in the tax year.

Where an exact value is not yet available, HMRC will allow a reasonable estimate. The employer must make a genuine attempt to arrive at an appropriate figure and revise it when better information becomes available.

Employers will therefore need to record:

• whether a value is final or estimated;
• the basis used for an estimate;
• when further information is expected; and
• whether the value has subsequently been corrected.

An estimate allows the benefit to be processed while accurate information is obtained. It does not remove the need to establish the final value.

What if the information arrives late?

HMRC expects changes identified during the tax year to be corrected through a later FPS where possible.

It also intends to introduce an end-of-year benefits update process for information that cannot be corrected during the year. Under the interim proposal:

• outstanding benefit information must be submitted by 22 July following the end of the tax year;
• employee tax adjustments will feed into P800, Simple Assessment or Self Assessment; and
• additional Class 1A National Insurance will be due by 19 July, or 22 July if paid electronically.

Detailed instructions have not yet been published. Further guidance is also expected on corrections involving employees who have already left.

A correction process will be needed for genuine late changes. If the same types of correction arise regularly, the employer may need to examine why the information is not reaching payroll before the cut-off.

What if there is not enough pay?

Reporting the benefit does not guarantee that all the associated tax can be collected.

PAYE is subject to the overriding limit. No more than 50% of an employee’s relevant pay can normally be deducted as Income Tax in a pay period.

The limit may become relevant where an employee:

• is on maternity or other statutory leave;
• is on long-term sickness absence;
• receives little or no cash pay;
• has a high-value benefit relative to salary; or
• leaves before the full tax can be collected.

The benefit must still be reported. Tax should be collected up to the permitted limit, with any balance carried into a later pay period where possible.

Amounts remaining uncollected at the end of the tax year may be dealt with by HMRC through:

• a P800 reconciliation;
• Simple Assessment; or
• Self Assessment, where applicable.

Mandatory payrolling requires the employer to report the benefit in real time. In some cases, PAYE will not be able to collect all the tax during the same period.

HMRC explains its proposed treatment in the guidance on cases where the full tax cannot be collected.

What happens to tax codes?

Employers will not need to register for benefits brought into mandatory payrolling.

HMRC intends to remove the relevant benefit estimates from employees’ tax codes before the new system begins on 6 April 2027. Adjustments included in a code to collect tax underpaid in an earlier year will remain.

An employee could therefore:

• pay tax through payroll on a benefit received in 2027–28; and
• have tax deducted through their code for an underpayment relating to an earlier year.

The employee may believe that the same benefit is being taxed twice. It will need to be explained that current-year benefits are being taxed through payroll while an earlier underpayment is still being collected through the tax code.

Employees experiencing hardship because of an earlier underpayment will normally need to discuss their circumstances with HMRC.

Employers wishing to payroll loans or accommodation voluntarily for 2027–28 will need to register. HMRC expects the registration service to open in November 2026, with registration required by 5 April 2027.

Paying Class 1A National Insurance

Class 1A National Insurance on benefits within mandatory payrolling will be reported and paid during the year rather than dealt with entirely after the year end.

During 2027–28, an employer may need to pay:

• Class 1A National Insurance in July 2027 for benefits provided during 2026–27; and
• Class 1A National Insurance in real time on benefits provided during 2027–28.

These are liabilities for different tax years rather than two charges on the same benefit. Nevertheless, both will fall within the same financial year and should be included in cash-flow planning.

An FPS may also be required where an employee or director receives a reportable benefit but has no cash earnings. HMRC has confirmed the broad requirement but has said that further operational guidance will follow.

Do P11Ds disappear?

Mandatory payrolling will not remove every P11D immediately.

Annual reporting may still be required for:

• loans or accommodation that have not been voluntarily payrolled;
• benefits that do not enter mandatory payrolling until April 2028;
• certain corrections or exceptional cases; and
• any other amounts that remain within the annual reporting system.

Some employers may therefore operate two processes during 2027–28:

• real-time reporting for benefits included in the first phase; and
• annual reporting for benefits that remain outside it.

Mandatory payrolling should substantially reduce P11D and P11D(b) reporting once fully implemented. Employers will still need to identify, value and reconcile benefits at the end of the year.

The annual employee statement

Payrolling a benefit does not remove the employer’s responsibility to provide information to the employee.

An annual statement must show:

• the benefits provided;
• which benefits were payrolled; and
• the value of those benefits.

It must be provided by 1 June following the end of the tax year.

HMRC does not currently intend to prescribe a standard format or add detailed benefit information to the P60 or P45. The annual benefit statement will therefore remain a separate employer responsibility.

A year-end reconciliation will also be needed to compare the benefits actually provided with the amounts reported through payroll.

What happens if an error is made?

HMRC has announced a limited easement for the first year.

For 2027–28, inaccuracy penalties will not normally be charged for errors relating to mandatory payrolling unless there is evidence of deliberate non-compliance.

However:

• late filing penalties will still apply;
• late payment penalties will still apply;
• statutory interest may be charged; and
• the existing penalty rules will continue for P11D and P11D(b) returns that remain necessary.

The easement does not suspend the reporting or payment obligations.

Preparing for April 2027

The starting point is to identify every benefit and taxable expense currently provided.

For each benefit, consider:

1. Who knows that the benefit has been provided?
2. Who holds the information needed to value it?
3. Who decides whether it is taxable or exempt?
4. How and when does the information reach payroll?
5. Can it arrive before the payroll cut-off?
6. Who checks the value and employee allocation?
7. How are changes, estimates and corrections recorded?
8. Can the reported amounts be reconciled at the end of the year?

The answers should support a practical preparation plan:

• separate the benefits entering mandatory payrolling in April 2027 from those following in April 2028;
• confirm that payroll software will support the required FPS reporting;
• agree responsibilities across payroll, HR, finance and external providers;
• establish cut-off dates and arrangements for late information;
• identify employees who may be affected by the 50% overriding limit;
• review the transitional Class 1A cash-flow effect;
• plan employee communications and the annual benefit statement; and
• review the process again when HMRC publishes final legislation and guidance.

More than a change to the P11D

The calculation can be stated quite simply: value the benefit, divide it across the year and include it in payroll.

Before that calculation can be made, payroll needs to know:

• that the benefit has been provided;
• when it started or ended;
• whether the information is complete;
• whether the value is accurate; and
• whether the circumstances have changed.

Mandatory payrolling changes the reporting method, but it also changes when information is needed. Preparation must therefore cover the movement of information between benefits administration, finance, HR, external providers and payroll.

The organisations best prepared for April 2027 will be those in which accurate information reaches payroll before the benefit must be reported.

This article reflects HMRC’s interim guidance as updated on 15 June 2026. The draft legislation has not yet been enacted, some operational details remain unresolved, and the guidance may change before implementation. HMRC’s complete collection is available in its interim guidance on mandatory payrolling.

‍

About the authorStephen Hendren is a payroll consultant and founder of BeePayWise. He works with employers, accountants and payroll bureaus on payroll compliance, operational controls and the practical implementation of legislative change.

‍