UK Payrolling Benefits in Kind Guide 2026/27

What is Payrolling of Benefits?

Payrolling benefits in kind means including the cash equivalent value of non-cash benefits in the employee's regular payroll calculations, so that income tax is collected through PAYE in real time rather than via an end-of-year P11D/tax code adjustment process.

Under the old P11D regime, employers reported benefits after the tax year ended (by 6 July), and HMRC then amended employees' tax codes in the following year to collect the tax -- creating a permanent one-year lag where employees were taxed on prior-year benefits in the current year.

Under payrolling, the benefit is added to earnings in the pay period when it is received. The payroll software calculates income tax on the combined salary plus benefit value, and PAYE is deducted accordingly. This produces more accurate in-year taxation and eliminates the code-adjustment lag.

Mandatory from April 2026

HMRC made payrolling of most benefits in kind compulsory from 6 April 2026, the start of the 2026/27 tax year. This was announced in advance to allow employers and payroll software providers time to prepare. The key implications:

• Employers who had voluntarily registered for payrolling before April 2026 simply continue.
• Employers who had not voluntarily payrolled must now report benefits through payroll for 2026/27.
• P11D forms are no longer required for payrolled benefits -- reporting moves to RTI submissions.
• Employers must ensure their payroll software is updated to support mandatory payrolling of each benefit type.

HMRC issued guidance and updated the PAYE Real Time Information (RTI) technical specifications to accommodate mandatory payrolling. Most major payroll software providers updated their platforms before the April 2026 start date.

Benefits Included in Mandatory Payrolling

Most employer-provided benefits are subject to mandatory payrolling from 2026/27. Common payrolled benefits include:

• Company cars -- the annual P11D cash equivalent (list price x CO2 BIK percentage) is divided by pay periods and added to payroll.
• Company vans -- the £3,960 flat van BIK is divided by pay periods and added to payroll.
• Fuel benefits -- car fuel benefit (list price x CO2 % x fuel charge multiplier) and van fuel benefit (£757) are payrolled.
• Private medical insurance (PMI) -- the P11D cost to the employer is payrolled.
• Gym membership -- the cost to the employer is payrolled.
• Non-cash gifts above trivial benefit limit -- added to payroll if above £50 and not covered by the trivial benefit exemption.

For benefits with variable annual values (such as company cars where the list price or CO2 percentage may change), the annual benefit value is calculated at the start of the year and divided equally across pay periods. If a benefit changes mid-year (for example, the employee changes company car), the payrolled value is updated from the next pay period.

Excluded Benefits -- Still P11D

Two benefit categories cannot be payrolled and must still be reported via P11D:

Employers providing cheap loans (below HMRC's official interest rate) or living accommodation still complete P11D forms for these specific benefits and submit P11D by 6 July following the tax year. Class 1A NI on the excluded benefits is included in the P11D(b) return.

How Payrolling Works in Practice

The payrolling process for a typical benefit (e.g., company car) works as follows:

1. At the start of the tax year (or when a benefit is first provided), calculate the annual cash equivalent of the benefit (e.g., car list price x CO2 BIK percentage).
2. Divide the annual benefit value by the number of pay periods (12 for monthly payroll, 52 for weekly).
3. Add the per-period benefit amount to the employee's gross earnings in the payroll calculation as a notional pay item.
4. Income tax is calculated on the combined salary plus benefit notional pay via the normal PAYE tax table / tax code.
5. The notional benefit pay is deducted (it is not actually paid to the employee in cash -- it simply increases the tax deducted).
6. Report the payrolled benefit value in the FPS (Full Payment Submission) to HMRC each pay period.

The employee's net take-home pay is reduced by the income tax on the benefit, not by the benefit value itself. The employer must ensure payroll calculations clearly distinguish between cash earnings and payrolled benefit notional pay for compliance and employee clarity.

Effect on Employee Tax Codes

Under the old P11D regime, HMRC issued reduced tax codes to employees in the yearfollowing the year a benefit was provided. For example, a car benefit of £8,000 in 2024/25 would result in a tax code reduction in 2025/26 to collect the tax -- a one-year lag.

Under mandatory payrolling, the benefit is taxed in the year it is provided. HMRC therefore does not need to include the benefit in the following year's tax code -- the tax code adjustment is removed. Employees see a more accurate, higher tax code (closer to the standard 1257L or appropriate adjusted code) and more even tax deductions throughout the year.

When payrolling is introduced, HMRC updates existing tax codes to remove the benefit reductions that were in place under P11D. Employees should check their tax code notice (P2) to ensure HMRC has removed legacy benefit deductions that are now being payrolled. Any residual P11D benefit reductions in the tax code (for excluded benefits like loans or accommodation) will remain.

Class 1A NI -- Still Due 19 July

Payrolling changes the income tax timing for employees but does notchange the timing of employer Class 1A NI. Class 1A NI at 15% on benefit values remains due by:

• 19 July following the tax year (postal payment)
• 22 July following the tax year (electronic / Faster Payment)

For 2026/27 benefits provided between 6 April 2026 and 5 April 2027, Class 1A NI is due by 19 July 2027. The total Class 1A NI due is calculated on the annual cash equivalent of all payrolled and P11D benefits combined. The P11D(b) form (declaration of total benefits and Class 1A NI) must be filed by 6 July 2027.

Late payment of Class 1A NI attracts interest at the HMRC official rate plus surcharges for repeat lateness. Employers should ensure treasury management accounts for the July Class 1A NI payment -- it can be a significant cash outflow for employers with large benefit schemes (private medical, fleet cars, etc.).

P11D Abolition and Transition

P11D forms are abolished for compulsorily payrolled benefits from 2026/27. The simplified reporting landscape from April 2026:

• RTI FPS: payrolled benefit values reported per employee per pay period via Full Payment Submission (FPS) in real time.
• P11D: still required for cheap loans and living accommodation only, filed by 6 July 2027 for 2026/27.
• P11D(b): still required for declaration of total Class 1A NI liability, filed by 6 July 2027 for 2026/27.
• P11D copy to employee: replaced by the employer-provided benefit statement for payrolled benefits, issued by 1 June 2027 for 2026/27.

Transitional year considerations: employers who moved from P11D to mandatory payrolling in April 2026 need to ensure no double-counting occurs for benefits that were taxed via tax code adjustments in 2026/27 (carried over from P11D 2025/26) and simultaneously payrolled in the same year. HMRC issued specific guidance on managing this transition.

Employee Benefit Statements

Employers must provide each employee with a written statement of payrolled benefits by 1 June following the tax year. For 2026/27 the deadline is 1 June 2027. The statement must show:

• Each benefit that was payrolled during the year and its description (e.g., "Company Car -- Ford Kuga").
• The cash equivalent value of each benefit for the year.
• Confirmation that the benefit has been included in the payroll for income tax purposes.

This statement is important for employees who complete Self Assessment returns (directors, higher-rate taxpayers, etc.) as it provides the data needed to report benefits on the employment pages. It also allows employees to check that the benefit value payrolled matches what they expected -- errors in benefit valuation can result in over or under deduction of income tax through the year.

Payroll Software Requirements

To operate mandatory payrolling from April 2026, payroll software must be able to:

• Record benefit type, description and annual cash equivalent value per employee.
• Divide annual benefit value by pay periods and add as a notional pay item per period.
• Calculate income tax on gross earnings including payrolled benefit notional pay.
• Deduct the notional benefit amount from the payrolled gross (ensuring net pay is correctly calculated -- benefit is taxed but not paid in cash).
• Include payrolled benefit amounts in RTI FPS submissions to HMRC.
• Produce the annual employee benefit statement by 1 June.
• Handle mid-year benefit changes (new car, change of medical plan, etc.).

All major payroll software providers (Xero, BrightPay, Sage Payroll, QuickBooks Payroll, MooHR, HMRC Basic PAYE Tools) updated their platforms to support mandatory payrolling before April 2026. Employers using older or non-compliant software should upgrade or switch providers. HMRC's Basic PAYE Tools supports mandatory payrolling for small employers as a free option.