Reprieve for rollout of mandatory payrolling?

Payrolling

Payrolling of benefits means including an estimate of the benefit in each pay period, withholding PAYE in real time, and paying it along with the Class 1A NI to HMRC within the monthly timescale. In a further nod to the resulting practical challenges, mandatory payrolling will now be introduced in phases starting on 6 April 2027, with only certain benefits affected. HMRC has recently updated its interim guidance and further consultation will continue during 2026.

The upshot is that 2027/28 will require a dual system of P11Ds and payrolling, with P11Ds largely phased out from 2028/29, except in relation to cheap loans, employer-provided accommodation, globally mobile employees and taxed award schemes.

2027/28 - Phase 1

From 6 April 2027, the following benefits and taxable expenses must be payrolled:

• private medical insurance
• employer-provided cars and vans; and
• the associated fuel benefit.

In respect of other benefits, the employer has a choice between voluntary payrolling or remaining within the P11D regime.

Voluntary payrolling

Voluntary payrolling for 2027/28 will be available in respect of all non-mandatory benefits but will require prior registration (opening November 2026 to April 2027). Although HMRC warns that the voluntary system won’t mirror the mandatory regime, employers may feel that payrolling all benefits is ultimately a simpler course, especially for employees.

Getting it wrong

If errors occur, the employer will need to make a best estimate of the actual position and correct it as soon as possible. HMRC will not levy penalties for inaccuracies for 2027/28 unless there is evidence of deliberate non-compliance. However, the usual real-time information (RTI) penalties will apply for late filing and late payment.

As with normal payroll, adjustments will be made on the next full payment submission (FPS).

Example. Tom receives a medical benefit from April but the employer won’t receive confirmation of its value until August. In the meantime, Tom’s employer estimates payroll monthly deductions of £100. In August, when five earnings payments have already been made, the benefit’s cash equivalent is confirmed at £1,500. After deducting the £500 already payrolled, the balance still due for the tax year is £1,000. As there are seven months remaining in the tax year, Tom’s taxable benefit increases to £142.85 from September.

Computing monthly benefit amounts and reconciling this to the tax year to date are new tasks. In particular, the impact of a change of car should be spread across the remaining months of the tax year to avoid a massive adjustment in one month.

The employer must submit a revised FPS by an undefined deadline (expected to be before 19 July following the end of the tax year) with no requirement to explain the need for changes. Any additional amounts due to HMRC will be payable by the following 22 July. Employers will need to issue a revised P60 where necessary.

Example. Jerry changes company cars on 25 January 2028 but the new car’s value is not ascertained until May 2028. His employer continues to payroll £1,000 per month as an estimate. When the employer obtains information that the correct benefit value for 2027/28 was actually £15,000, a revised FPS is submitted. HMRC will collect the extra tax due from Jerry through the self-assessment system or the issue of a P800 or PA302 . The employer must pay the extra Class 1A NI by 22 July 2028.

Transition to compulsion

For those still using P11Ds in 2026/27, compulsion could come as a shock unless careful preparation plans are laid. Mandatory payrolling is a sea change from the retrospective system of P11Ds which encouraged a “worry about that later” attitude, with a comfortable gap between the tax year end and reporting date.

Employer and employee impact

Unless the employer chooses to voluntarily payroll all benefits, they will need to keep their wits about them for 2027/28, given that the P11D regime and payrolling will exist in tandem . Managing cash flow resulting from the real time payment of Class 1A NI requires good financial planning, particularly in respect of July 2027 and July 2028 when the Class 1A NI liability for the previous tax year is also due.

In 2027/28, employees could be potentially paying tax:

• in real time on car, van, fuel and medical benefits (Phase 1 benefits);
• in arrears on Phase 1 benefits from 2026/27 and earlier through the 2027/28 tax code; and
• on an estimate of 2027/28 non-phase 1 benefits, again through the 2027/28 tax code.

In particular, employers must ensure they clearly explain the differing treatment of certain benefits to their employees, for whom it will be far from obvious why certain items are taxed one way compared to another. While they may have been hazy about the true cost of their benefits up to now, and what the entries in their tax code actually mean, employees will notice the deductions on their payslip and any dent in their take-home pay. When you add in the illusion of paying tax twice (what HMRC colloquially calls “overlapping taxation”), i.e. making up for underpayments in prior years in the tax code while seeing actual deductions from pay in real time, the uphill struggle is clear.

The worst case will be for an employee who only started receiving a Phase 1 benefit in 2026/27 which continues in 2027/28. As the 2026/27 benefit will only be reported on a P11D in July 2027, the tax will be wholly paid through the 2027/28 tax code.

In fact, HMRC has admitted that the situation may be so dire that affected employees, who are in financial hardship due to coding consequences, will be able to ask for the debt to be spread over a longer timescale.

This is an opportunity for employers to step in by anticipating any issues by forecasting net pay from April 2027 and then assisting impacted employees with their communications with HMRC. The employer’s responsibility extends beyond merely reporting benefits data. They will need to ensure the end result for the employee is correct.

Advice to employers

The real challenge is collating and processing the expanded amount of data within a tight timescale. Marrying up internal accounting processes with the needs of payrolling may not be easy at first for some.

Modelling the first few months of payrolling in advance should throw up some of these problems which can then be addressed before the system goes live.

Ensure the following tasks are completed well before April 2027:

• identify which employees and benefits fall within Phase 1, and whether these employees are all on the same earning periods
• decide whether it would be preferable to payroll all benefits from 2027/28 (with the exception of loans and accommodation)
• work out how to acquire the necessary data in time; and
• put in place processes for how adjustments will be promptly dealt with.

Company cars present the greatest risk as the information required is more complex, involving car and fuel type, usage dates and the tracking of reimbursement for fuel.