From April 2027, one of the biggest changes to the reporting of employee benefits in decades will begin to take effect.
For many employers, the familiar annual P11D process will start to disappear as certain benefits move into mandatory real-time payroll reporting.
The first phase will apply to company cars, car fuel, vans, van fuel and employers-provided medical benefits, with most other benefits expected to follow from April 2028.
Although April may still seem some way off, it’s vital to start preparing early to experience a far smoother transition. To do this, we need to start by understanding what is changing and what benefits your organisation currently provides.
How your benefits will change
Under the current system, employers typically report Benefits in Kind (BiKs) to HMRC after the end of the tax year using forms P11D and P11D(b). From April 2027, the first group of mandatory benefits will instead need to be reported through payroll as they arise, with Income Tax and Class 1A National Insurance Contributions reported through Real Time Information (RTI) submissions.
The objective here is to ensure employees pay the correct tax in real time rather than through adjustments to tax codes or retrospective calculations. For employers, however, this represents far more than a simple reporting change, as it will impact payroll processes, HR administration, employee communications and benefit management.
The management can be tricky as many businesses have accumulated benefits over time and may not have a complete, centralised view of everything currently reported through P11Ds. A review should identify:
- Company cars/vans and fuel benefits
- Private medical insurance
- Beneficial loans and living accommodation arrangements
- Any other Benefits in Kind currently reported on P11Ds
Creating a complete inventory now will help establish which benefits fall within the initial mandatory regime and which may be affected in future phases.
Working with payroll
One of the bigger and more practical challenges in this process will be ensuring payroll receives accurate benefit information at the right time.
Historically, benefit values could often be reconciled at year end, but real-time reporting requires a different approach. Changes to company cars or private medical cover, for example, will need to be reflected much more quickly. So, in terms of a practical steps, businesses should consider:
- Where benefit data originates
- Who is responsible for maintaining it
- How frequently it changes
- How the information is shared between HR, finance and payroll
Any weaknesses in these processes are likely to become more visible once reporting moves into payroll, and the software used will play a central role in that reporting. It will be crucial for employers to begin discussions with software providers or their payroll bureaux well before April 2027. You’ll need as much time as possible to understand how payrolled benefits will be processed, what additional data needs to be captured, whether system upgrades are required, as well as any testing opportunities that are available before implementation. Starting the conversation now will help alleviate any unnecessary pressure on payroll teams that may occur when the changes take effect.
Communicating changes to your employees
Many employees have become accustomed to paying tax on benefits through tax code adjustments, but with the move to mandatory payrolling, some employees will see changes to their payslips and potentially their take-home pay. While the overall tax position should not change, the timing of tax collection often will, so clearly communicating how their benefits and tax deductions will look and how existing tax code adjustments may be affected will be essential.
Perhaps the most important point is that mandatory payrolling is not purely a payroll issue. Payroll teams need accurate data, HR teams often administer benefits, and finance teams may oversee budgeting and benefit arrangements. Establishing clear responsibilities across departments, and identifying any gaps, is the best option to manage this transition effectively.
Don’t wait until 2027
The phased introduction announced by HMRC gives employers valuable preparation time, but it should not be seen as a reason to delay planning. Businesses that begin reviewing their benefits systems and internal processes now will be in a much stronger position when mandatory payrolling arrives.
Hillier Hopkins is already helping employers understand how the changes will affect their reporting obligations and preparing practical plans for implementation. Our tax and payroll specialists can help you review your current benefits reporting arrangements, identify areas requiring attention and ensure your business is ready for the transition ahead.
If your business provides employee benefits and would like to discuss the impact of mandatory payrolling, please get in touch with your usual Hillier Hopkins adviser.
