Payrolling benefits: what employers should know before 2027
Changes are coming to the way businesses handle employee benefits, and if you’re an employer, it’s time to take note. From April 2027 (the policy has been postponed from April 2026), HMRC will make payrolling of benefits mandatory, replacing the traditional P11D submission process for most employers. This shift means that taxable benefits will be taxed in real-time through PAYE tax deduction, rather than being reported at the end of the tax year.
For businesses, this change presents both challenges and opportunities. While it may streamline payroll processes in the long run, the transition will require careful planning. Here’s what you need to know about payrolling of benefits, how it differs from current reporting methods and, with Gravita’s payroll service, what steps you should take now to prepare.
What is a taxable benefit?
Taxable benefits – also known as benefits-in-kind (BIK) – are perks or expenses provided to employees that aren’t part of their salary but still hold monetary value. Common examples include company cars, private medical insurance, gym memberships, and interest-free loans from employers. Historically, these benefits were reported via a P11D submission at the end of the tax year, and employees would settle any tax due through their tax code adjustments.
Under payrolling of benefits, the tax on these perks will instead be collected through the monthly PAYE tax deduction, meaning employees pay tax on their benefits as they receive them, rather than through a delayed adjustment. This change brings tax collection in line with how salaries and bonuses are already taxed, offering a more predictable approach for both employers and employees.
How does payrolling of benefits work?
Employers who payroll benefits will include the taxable value of these perks in employees’ regular payroll calculations. This means that rather than waiting for a P11D at year-end, employees will see the tax deducted from their wages in real time. The advantage? Less admin for businesses, fewer surprises for employees, and a smoother overall tax process.
To start payrolling benefits, employers need to register with HMRC before the beginning of the tax year in which they want to apply it. Once registered, benefits must be processed correctly in payroll software, ensuring that tax is deducted accurately each pay period. Employers will still need to submit a P11D(b) form annually to report the total Class 1A National Insurance contributions due, but the cumbersome individual P11D forms will largely be eliminated. The HMRC guide on payrolling expenses and benefits explains how to handle this process correctly.
What changes in April 2027?
Currently, payrolling benefits is an optional system, but from April 2027, it will become mandatory for most employers. The full details are yet to be finalised, but HMRC’s goal is clear: simplify the way benefits are taxed and reduce the administrative burden of separate year-end reporting.
For employers who have yet to adopt payrolling of benefits, the next two years offer a crucial window to get systems in place, test processes, and ensure payroll software is up to date. Businesses that don’t prepare in advance risk facing compliance issues and potential fines.
P11D vs. Payrolling: what’s the difference?
For years, employers have relied on P11D submissions to report taxable benefits. This system, while effective, has its drawbacks. P11Ds are submitted after the tax year ends, meaning employees only see tax adjustments months later, often leading to unexpected tax bills.
With payrolling of benefits, tax is deducted as employees receive their benefits, making tax payments more predictable. It also reduces admin for employers, as they no longer need to submit individual P11D forms for each employee. Instead, only a P11D(b) form is required to report Class 1A National Insurance contributions.
Below, the table outlines the differences between P11D reporting and the new rules on payrolling of benefits.
| Feature | P11D Reporting (Old System) | Payrolling of Benefits (New System) |
|---|---|---|
| Tax Collection | Adjusted via employee tax codes after year-end | Deducted in real time through PAYE |
| Employer Reporting | Annual P11D submission for each employee | No individual P11Ds; benefits processed through payroll |
| Employee Taxation | Tax paid later, sometimes leading to unexpected bills | Tax deducted as benefits are received, avoiding surprises |
| Admin Burden | High – separate year-end reporting required | Lower – more integrated with payroll |
| Class 1A National Insurance (NI) | Still requires P11D(b) submission | Still requires P11D(b) submission |
| Implementation Timeline | Ends in April 2026 | Becomes mandatory from April 2027 |
How much is employers’ NI and what does this mean for costs?
Employers already pay National Insurance (NI) contributions on most taxable benefits, and these costs won’t disappear with the transition to payrolling. Class 1A NI contributions, currently set at 13.8%, will still apply to benefits-in-kind. However, by incorporating benefits into payroll systems, businesses may be able to manage their cash flow more effectively and reduce year-end surprises.
With the recent changes to employers’ NI rates, businesses should also review how payrolling of benefits might impact their overall payroll strategy. Our breakdown of the latest NIC rate changes explores what this means for employers.
Balancing compliance with a strong staff benefits programme
Even with the shift to payrolling of benefits, offering a strong staff benefits programme remains essential for attracting and retaining top talent. Employees value perks like private healthcare and company cars, and businesses need to strike a balance between compliance and competitive offerings.
For some businesses, this transition may be an opportunity to reassess which benefits they offer and how they communicate them to employees. If a benefit’s tax treatment changes, will it still be valuable to staff? Employers should take this time to review their benefits packages and ensure they remain an effective tool for recruitment and retention. With ongoing legislative changes, businesses should also consider the payroll challenges expected in 2025.
It is important to start preparing for the changes now. The table below outlines the risk of getting it wrong, which can be mitigated by involving your accountant early.
| Risk | Impact on Business | How to Mitigate |
|---|---|---|
| Non-Compliance with HMRC Rules | Fines and penalties for incorrect or late payroll processing | Register with HMRC early and update payroll software |
| Payroll Software Issues | Inaccurate tax deductions, incorrect reporting | Work with payroll providers to ensure compliance |
| Employee Confusion | Staff may not understand why their net pay is different | Communicate changes clearly to employees |
| Cash Flow Disruptions | Poor planning could lead to unexpected NI costs | Forecast payroll costs and adjust budgeting |
| Increased Administrative Burden in 2027 | Last-minute transitions may cause errors and stress | Start implementation and testing well in advance |
How Gravita can help
Switching to payrolling of benefits doesn’t have to be a headache, but waiting until the last minute could cause compliance risks and unnecessary stress. Gravita’s payroll experts can help you make a smooth transition, ensuring your systems are ready, accurate, and optimised for efficiency.
Contact our team today to discuss how we can support your business through these changes.
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