Mandatory Payrolling Is Coming: What Employers Need to Know

If you provide your team members with perks like medical insurance, a company van, or a company car, you are probably used to the annual headache of P11D forms. But the way HMRC collects tax on these benefits is about to undergo a massive shift.

Before we look at how to prepare, let us clear up exactly what "mandatory payrolling" actually means for you and your team members.

What exactly is payrolling?

Currently, if you give a team member a benefit in kind, you usually report it to HMRC at the end of the tax year. Payrolling changes this completely by moving the tax calculation into real-time.

Under payrolling, the taxable amount of a benefit in kind is treated like extra pay. This amount is paid to the team member with the same frequency as their normal cash pay.

Here is how it works in practice:

• Imagine a monthly-paid team member receives medical insurance with a cash equivalent value of £600.

• Under the new rules, the team member's gross pay for PAYE purposes each month would include an extra £50 in respect of the medical insurance benefit.

• Tax is worked out on the total gross pay in the pay period.

• That tax is then deducted directly from the team member's cash pay.

However, because most benefits in kind are within Class 1A National Insurance, rather than Class 1, the payrolled benefit is not included in gross pay for National Insurance purposes.

Watch your cash flow

The biggest shock for business owners will not be the admin - it will be the timing of your tax bills. Under mandatory payrolling, the associated Class 1A National Insurance will be reported through Real Time Information on the Full Payment Submission each month. You will have to pay this over to HMRC along with the PAYE and Class 1 National Insurance for the month. This will bring forward the payment date and may have cash flow implications for employers.

Here are the top reasons you need to start preparing your systems today

1. Phase one starts in April 2027

The Government originally planned to make payrolling mandatory for everything at once, but it has now been announced that the introduction will be phased in. Mandatory payrolling will apply to specific benefits in kind in phase one from 6 April 2027.

From that date, employers must payroll these specific benefits:

• company cars

• car fuel

• company vans

• van fuel

• medical benefits

There is no need to register benefits for which payrolling is mandatory.

2. You lose your annual payment buffer

Right now, for the 2026/27 and earlier tax years, Class 1A National Insurance is included in the Class 1A National Insurance calculation on the P11D(b). The liability is paid in a single lump sum after the end of the tax year. Payment must be made by 22 July following the end of the tax year where payment is made electronically, or by 19 July if payment is made by cheque.

Losing this annual July buffer means your monthly outgoings will increase. Updating your cash flow forecasts now will ensure you are not caught short when the new rules begin.

3. The "overlap" period will stretch your reserves

Transitioning to a new tax system is rarely seamless. During the move to in-year collection, employers may pay some Class 1A National Insurance monthly and some after the end of the tax year.

This means you could find yourself paying off last year's annual lump sum at the exact same time you start paying your new monthly in-year liabilities. Planning your financial reserves for this overlap is vital.

4. Phase two catches the rest in 2028

Just as you get comfortable with phase one, the rules expand. From 6 April 2028, mandatory payrolling is extended to all other benefits in kind.

There are only two exceptions: taxable cheap loans and living accommodation benefits. Employers will be able to opt to payroll these voluntarily if they register to do so before the start of the 2027/28 tax year, but these exceptions are to be brought within mandatory payrolling from a later date.

5. It is the end of the road for the P11D

The best news in this update is that your annual paperwork burden will eventually vanish. Where a benefit is payrolled, it is not reported on the P11D. The introduction of mandatory payrolling will render the P11D obsolescent.

Because Class 1A National Insurance contributions are reported and paid in-year, benefits in kind within mandatory payrolling will not be included in the Class 1A calculation on the P11D(b). For 2028/29 and later tax years, the P11D(b) will only be used to calculate the Class 1A National Insurance liability on taxable cheap loans and living accommodation benefits where these are not payrolled.

The Trade-Offs

Moving to mandatory payrolling presents a clear trade-off for business owners.

On the positive side, dealing with tax in real-time means your team members will have more accurate tax codes. They are far less likely to be hit with unexpected tax bills at the end of the year. Furthermore, eliminating the annual P11D reporting process removes a significant administrative burden from your finance team.

On the negative side, the change introduces genuine financial friction. Bringing your Class 1A National Insurance payments forward to a monthly schedule removes a valuable cash flow buffer. You will also need to spend time educating your team members, as their monthly take-home cash pay will look different once the tax on their benefits is deducted in real-time.

Time to take action

The phased introduction of mandatory payrolling gives you a runway to prepare, but leaving it until the last minute is a risky strategy. By updating your cash flow projections and talking to your team members early, you can make the transition completely stress-free.

If you are using cloud software like Xero, QuickBooks, or FreeAgent and want to ensure your payroll processes are compliant and optimised ahead of these changes, we can help. At Inform Accounting, we specialise in helping modern businesses streamline their financial processes and navigate legislative updates without the jargon. Get in touch with us today to discuss how we can help you plan for a seamless transition.

Frequently Asked Questions (FAQs)

What does payrolling a benefit mean?

Under payrolling, the taxable amount of a benefit in kind is treated like extra pay. This value is added to your team member's gross pay in each pay period, and the tax is deducted directly from their cash pay.

When do the new mandatory payrolling rules start?

The rules are being phased in. Phase one begins on 6 April 2027 and applies to company cars, car fuel, company vans, van fuel, and medical benefits. Phase two begins on 6 April 2028 and applies to all remaining benefits in kind, with the exception of taxable cheap loans and living accommodation benefits.

Will I still need to file a P11D form?

Where a benefit is payrolled, it is not reported on the P11D. For 2028/29 and later tax years, the P11D and P11D(b) will only be used for taxable cheap loans and living accommodation, provided you have not opted to payroll these voluntarily.