Issue 03/October 2026 Mandatory payrolling of Benefits in Kind - Actions to take now.

Mandatory Payrolling of Benefits in Kind: What Employers Need to Do Now

Significant changes to the way Benefits in Kind (BIKs) are taxed are on the horizon, and employers should start preparing now to ensure a smooth transition.

From 6 April 2027, HMRC will begin the first phase of its Mandatory Payrolling of Benefits in Kind and Expenses initiative. This change will affect how certain employee benefits are reported and taxed, moving the process directly into payroll rather than relying on year-end reporting and tax code adjustments.

Understanding what is changing, how it will affect employees, and the steps businesses should take now can help avoid confusion and ensure compliance when the new rules come into force.

What Is Changing?

Currently, many Benefits in Kind are reported to HMRC after the end of the tax year through the P11D process. Employees then pay any tax due through adjustments to their tax code, meaning they are often paying tax on benefits after they have received them.

Under the new rules, tax on eligible benefits will be collected through payroll in real time, meaning employees will pay tax in the year they receive the benefit.

Phase 1: April 2027

The first phase of mandatory payrolling will apply to:

• Company cars
• Company car fuel
• Company vans
• Van fuel
• Private medical insurance and medical benefits

Phase 2: April 2028

Most other Benefits in Kind will move to mandatory payrolling from April 2028.

Why Is HMRC Making This Change?

The aim of mandatory payrolling is to simplify the tax system and improve accuracy. Collecting tax through payroll means employees pay the correct amount closer to the time they receive the benefit, reducing reliance on estimated tax code adjustments and helping minimize unexpected tax bills.

While the long-term goal is a more efficient process, the transition may create confusion for both employers and employees if preparations are not made in advance.

How Could Employees Be Affected?

Many employees may not realise that they currently pay tax on Benefits in Kind through their tax code. In some cases, HMRC adjusts a tax code based on an estimated value of benefits provided during the previous tax year.

From April 2027, this approach will change for benefits included in Phase 1. Instead, the tax due will be deducted through payroll as the benefit is received.

For some employees, this may result in noticeable changes to their payslips and take-home pay. Without clear communication, employees may mistakenly believe they are paying additional tax or even being taxed twice.

The Potential for Confusion

One of the biggest challenges during the transition period is that some employees may experience an overlap between previous tax code adjustments and the new real-time payroll deductions.

As a result, employees could see tax collected on current benefits while still dealing with adjustments relating to benefits received in earlier years. Although this does not mean they are paying tax twice, it may certainly feel that way if the changes have not been clearly explained.

Employers who communicate early and openly with their workforce can help prevent misunderstandings and reduce concerns when the new system is introduced.

What Should Employers Do Now?

Although the new rules do not take effect until April 2027, businesses should begin preparing well in advance.

Review Payroll Systems

Employers should check whether their payroll software will support mandatory payrolling for Benefits in Kind and ensure any required updates are implemented before the deadline.

Review Internal Processes

Businesses may need to change how benefit information is collected, recorded and reported. Establishing accurate processes now can help avoid problems later.

Identify Affected Employees

Understanding which members of staff receive company cars, fuel benefits, medical benefits or other taxable perks will make planning and communication easier.

Communicate With Employees

Perhaps the most important step is keeping employees informed. Explaining how the new system works, what changes they might see on their payslip and why their take-home pay could look different will help avoid unnecessary concerns.

Supporting Employees Through the Transition

Some employees may be worried if they notice changes to their tax deductions. Employers should be ready to explain the new rules and signpost employees to HMRC where appropriate.

In situations where overlapping tax liabilities create financial difficulties, employees may be able to discuss their circumstances directly with HMRC and explore available options.

Don't Leave Preparation Until the Last Minute

Although April 2027 may seem some way off, implementing payroll changes, updating systems and educating employees can take time. Businesses that begin planning now will be in a much stronger position when mandatory payrolling becomes a reality.

At AP Robinson, we can help you understand the upcoming changes, review your payroll procedures and ensure your business is ready for the new requirements. If you have any questions about Benefits in Kind, payroll compliance or the impact on your employees, please get in touch with our team today.