Mandatory payrolling of benefits from April 2027: what employers need to do now

Under the current system, benefits are reported after the end of the tax year, with tax typically collected later through employee tax codes. 

From April 2027, most benefits will instead be processed through payroll as they arise. This means: 

• the taxable value of benefits is included in each pay cycle  
• income tax is collected in real time via PAYE  
• reporting is aligned with the existing Real Time Information (RTI) process  

The annual P11D process will largely fall away for those benefits that fall within the new regime. 

There are some exceptions. Employer-provided living accommodation and beneficial loans are currently excluded from mandatory payrolling, although these may be brought into scope at a later stage. 

This move forms part of a wider shift towards real-time tax reporting. 

HMRC’s aim is to improve accuracy and reduce the need for adjustments after the tax year has ended. Under the existing approach, delays between receiving a benefit and paying the associated tax can lead to confusion, errors and unexpected tax bills for employees. 

By bringing benefits into payroll, tax is collected as the benefit is provided, creating a more immediate and transparent link between the two. 

For many businesses, the change is less about new tax and more about process. 

Benefits will move from being a year-end compliance exercise into an ongoing payroll responsibility. This requires a more consistent and structured approach to capturing and reporting data. 

In practical terms, you will need to: 

• identify all benefits currently provided to employees  
• determine how those benefits are valued throughout the year  
• ensure that accurate data flows into payroll in real time  
• review whether existing payroll systems can support the new requirements  

This is particularly relevant where benefits are currently tracked outside payroll, for example within HR or finance systems. 

The change also affects cash flow. Class 1A National Insurance, which is currently settled after the year end, will instead be accounted for during the year. This may require adjustments to budgeting and forecasting. 

Employees will see the effect of these changes directly. 

Rather than tax being adjusted later through their tax code, the value of benefits will appear on payslips as they are provided. This will reduce take-home pay in real time. 

For some employees, this will be a new experience. It is likely to generate questions, particularly in the first year of transition. 

• Employers will need to explain: 
• why payslips look different  
• how benefits are being taxed  
• why tax codes may change as HMRC removes benefits from coding ahead of April 2027  

Clear communication will be important to avoid confusion and maintain confidence.

A key part of the transition is ensuring employees are properly informed. 

Where benefits are payrolled, employers are expected to notify employees in writing. This communication should explain that benefits will be taxed through payroll and that the P11D process will no longer apply for those benefits. 

Employees should also be reassured that tax will not be duplicated, as HMRC will adjust tax codes to reflect the new approach. 

In addition, employers will still need to provide a year-end summary of benefits, giving employees visibility over what they have received and how it has been taxed.

Although April 2027 is the formal start date, preparation should take place during the current tax year. 

This is an opportunity to review how benefits are currently managed and identify any gaps. In many cases, the challenge lies in how information is gathered and shared, rather than the complexity of the benefits themselves. 

Areas to focus on include: 

• mapping existing benefits and how they are recorded  
• reviewing payroll system capability  
• aligning responsibilities across payroll, HR and finance teams  
• planning how changes will be communicated internally  

Some businesses are also considering how this change interacts with wider reward strategies, particularly where benefits form a key part of employee packages. 

Mandatory payrolling reflects a wider direction of travel. 

The tax system is moving towards real-time reporting, with less reliance on year-end corrections. For employers, this means processes need to be robust and accurate throughout the year. 

While this introduces additional discipline, it also creates greater clarity. Tax is dealt with at the point it arises, rather than retrospectively. 

Preparing for mandatory payrolling is not just about payroll. It requires a coordinated approach across your business. 

At Old Mill, we support employers in reviewing their current position, identifying where changes are needed and putting practical processes in place ahead of April 2027. 

Taking action now will make the transition smoother and reduce the risk of disruption as the new requirements come into force. If you would like to discuss how these changes will affect your business, or review your readiness, get in touch click here…