HM Revenue & Customs (HMRC) has confirmed a significant overhaul of how Benefits in Kind (BiKs) are reported and taxed, marking one of the biggest payroll changes in more than a decade. Announced in June 2026, the government has adopted a phased approach to the introduction of mandatory payrolling of Benefits in Kind, replacing the long-established P11D reporting process for most taxable employee benefits from April 2027.

The decision follows extensive consultation with employers, payroll providers and tax professionals, with HMRC concluding that a phased implementation will reduce disruption while supporting businesses through the transition.

Why is HMRC changing P11D reporting?

The government’s objective is to modernise the taxation of employee benefits by moving from annual reporting to real-time reporting through payroll. Under the current system, employers typically submit P11D forms after the end of the tax year, with employees often paying any resulting tax months later through adjustments to their PAYE tax code.

Mandatory payrolling will instead ensure Income Tax on most Benefits in Kind is collected as the benefit is received. HMRC believes this will simplify administration, improve tax accuracy and reduce the number of tax code corrections and unexpected tax bills for employees. The reforms also form part of the government’s wider strategy to digitise the UK tax system, reduce reporting errors and help close the tax gap.

A phased rollout from April 2027

Following industry feedback, HMRC has delayed the original implementation timetable and introduced a phased rollout.

From 6 April 2027, mandatory payrolling will apply to several of the UK’s most common employee benefits, including company cars, car fuel, vans, van fuel and employer-provided medical benefits. Most remaining taxable Benefits in Kind will move to mandatory payroll reporting from April 2028.

Some benefits remain outside the initial mandatory regime. Employment-related loans and living accommodation will continue to be reported using existing arrangements for the time being, although employers will be able to payroll these voluntarily.

What does this mean for employers?

For employers, the reforms represent a fundamental change in payroll administration.

Instead of preparing P11D forms after the tax year has ended, businesses will need systems capable of identifying taxable benefits throughout the year and reporting them accurately through Real Time Information (RTI) submissions.

Although the move removes much of the annual P11D administration, it also requires payroll, HR and finance functions to work far more closely together. Information about company cars, private medical insurance and other taxable benefits must reach payroll promptly to ensure the correct tax is deducted each pay period.

Employers should also review whether their payroll software is compatible with HMRC’s new reporting requirements and ensure payroll teams receive appropriate training before implementation. HMRC has repeatedly stressed that businesses should begin preparations well in advance rather than waiting until 2027.

The reforms will also affect employer National Insurance. Rather than calculating Class 1A National Insurance after the end of the tax year for affected benefits, employers will increasingly account for liabilities through the new real-time process.

What changes for payroll agents?

Payroll bureaux, accountants and tax agents will play an increasingly important role during the transition.

Agents must ensure client payroll systems are configured correctly, benefit values are captured accurately and reporting processes comply with HMRC’s new technical specifications. Businesses that outsource payroll should begin discussions with their providers now to understand software upgrades, testing schedules and any additional reporting requirements.

Because benefit information often originates outside payroll, agents may also need to help clients redesign internal processes so benefit data reaches payroll teams before each pay run.

What does it mean for employees?

For employees, the biggest change will be when tax is collected.

Rather than receiving a tax code adjustment months after receiving a benefit, employees will generally pay tax as they receive the benefit through deductions made directly via payroll.

This should make tax liabilities more transparent and reduce the risk of unexpected underpayments caused by outdated tax codes or late P11D submissions. Employees should also find it easier to understand how taxable benefits affect their monthly take-home pay, as the deductions will appear much closer to the point the benefit is provided.

However, employers will need to communicate these changes clearly. Payslips may look different, and some employees could initially question why deductions have changed despite no alteration to their salary package.

Why the phased approach matters

The government’s decision to phase implementation has been broadly welcomed across the payroll profession.

Mandatory payrolling represents the largest change to employee benefit reporting since Real Time Information was introduced for PAYE in 2013. By introducing the most common Benefits in Kind first before expanding the regime in 2028, HMRC hopes employers, software developers and payroll providers will have sufficient time to adapt systems and resolve any operational issues.

HMRC said the phased approach “will support a smoother transition for businesses” following stakeholder feedback received during consultation.

Preparing for the new system

Although the first mandatory stage begins in April 2027, employers should not delay preparations.

Reviewing all taxable benefits, auditing existing payroll processes, confirming software compatibility and ensuring accurate benefit data flows into payroll will all help minimise disruption. Organisations with complex benefit packages or multiple payroll providers may require considerably more planning.

For businesses already navigating wider payroll and employment tax reforms, the transition away from P11D reporting represents both a compliance challenge and an opportunity to simplify benefit reporting over the longer term.

As HMRC continues to publish detailed guidance and technical specifications, early preparation will be essential to ensure employers, payroll professionals and employees are ready for one of the UK’s most significant payroll reforms in recent years.