Benefits in kind — the non-cash perks employers provide to staff, from company cars and private health insurance to gym memberships and interest-free loans — have always sat slightly awkwardly in the tax system. For most employers, they’re reported once a year via a P11D form, and employees end up paying the associated income tax through an adjusted tax code. It’s a system that works, but it’s never been especially tidy.

That’s about to change. From 6 April 2027, HMRC is introducing mandatory payrolling of benefits in kind. Instead of annual P11D reporting, most benefits will need to be reported through payroll in real time. It’s a significant shift — and one that’s worth understanding well in advance, rather than scrambling to sort in March 2027.

Below, we explain what the change involves, what it means for your payroll processes, and what practical steps you should be taking now.

A benefit in kind is any non-cash perk or advantage an employer provides to an employee (or a member of their family or household) that has a taxable value. Common examples include:

• Company cars and fuel
• Private medical or dental insurance
• Gym memberships
• Interest-free or low-interest loans from the employer
• Living accommodation provided by the employer
• Vouchers and gift cards

These benefits are subject to income tax for the employee and, in most cases, Class 1A National Insurance for the employer. Until now, the standard process has been to submit a P11D form to HMRC each year (by 6 July following the end of the tax year), and for the employee’s tax code to be adjusted so the income tax is collected over the following year. It’s a delayed, annual process — which is part of why HMRC wants to move it into real-time payroll.

For many smaller businesses, this has meant keeping a separate log of benefits provided throughout the year and handing it to their accountant for P11D preparation. That process is going away. Understanding what you currently offer — and how it’s being tracked — is the first step in getting ready.

From 6 April 2027, the vast majority of benefits in kind and expenses will need to be reported through the Full Payment Submission (FPS) — the same real-time submission employers already use to report wages and salaries to HMRC each pay period.

This means the P11D process for most benefits is being phased out. Tax on those benefits will be collected through payroll in real time, rather than through a year-end code adjustment.

A few things worth knowing about how this will work in practice:

• No registration required. Unlike the current voluntary payrolling scheme, employers will not need to sign up or register to payroll most benefits from April 2027. It will simply be mandatory.
• HMRC will update tax codes automatically. HMRC has confirmed it will remove benefits in kind from employees’ tax codes ahead of April 2027. However, any underpayments from previous years will not be cleared — those will still need resolving through the existing process.
• Loans and accommodation are different. Employment-related loans and employer-provided accommodation are not included in the mandatory requirement from day one. Employers who want to payroll these voluntarily from April 2027 will need to register by 5 April 2027, with that registration service opening in November 2026.

It’s also worth noting that this deadline has already moved once — the original date was April 2026, and the government pushed it back a year following pressure from professional bodies including the ICAEW, who welcomed the additional preparation time.

April 2027 might feel comfortably far away, but in our experience, payroll process changes take longer to implement than people expect — especially when they touch employee communications, payroll software configuration, and internal admin workflows.

Here’s how we’d suggest approaching it:

1. List all the benefits you currently provide

HMRC’s own guidance suggests this as an early step, and it’s good advice. Many employers have benefits dotted across different systems — company cars managed by one team, health insurance by another, ad hoc expenses claims elsewhere. Getting a consolidated picture of everything you currently provide is the foundation for everything else.

2. Check what your payroll software supports

Not all payroll software is currently set up to handle benefits reporting through the FPS. If you use a cloud-based system like Xero or QuickBooks, check with your provider (or us) about when support for mandatory payrolling of benefits will be available and what configuration is needed.

3. Talk to your employees

This is one that often gets forgotten. Employees whose benefits have historically been collected through a tax code adjustment will see a change in how and when that tax is deducted. HMRC recommends employers communicate this proactively — it avoids the confused payslip queries in April 2027.

4. Decide whether to voluntarily payroll loans or accommodation

If you provide employment-related loans or accommodation to any employees, you’ll need to decide whether to include these under the voluntary scheme from April 2027. Registration opens in November 2026, with a deadline of 5 April 2027.

For most employees, the headline impact is straightforward: they’ll pay the tax on their benefits through their regular payslip rather than through a tax code adjustment at the end of the year.

In practice, this means the tax cost of a benefit like private medical cover will show up as a deduction each pay period — rather than arriving invisibly via a reduced tax allowance. For some employees, this will make their benefits feel more tangible and visible, which isn’t necessarily a bad thing.

There’s an important wrinkle worth flagging, though: HMRC will be removing benefits from employees’ existing tax codes ahead of April 2027 to avoid double-taxing people. But any underpayments that have already built up from previous years will not be cleared as part of this process. If any of your employees have historical underpayments sitting in their tax codes relating to benefits, those will still need to be settled.

The clearest thing employers can do for their staff is to communicate early and clearly — explaining that from April 2027, tax on benefits will be deducted through payroll rather than through a code adjustment, and what that means for their take-home pay each month. We tend to draft a simple one-page note for clients to share with employees — it avoids a lot of unnecessary confusion down the line.