The End of Most P11Ds: What Mandatory Payrolling Means for Employers

For decades, reporting employee benefits has followed much the same annual cycle. An employer provides a company car, private medical cover or another taxable benefit, and the benefit is reported to HMRC after the end of the tax year, usually through form P11D.

That system is about to change significantly.

From 6 April 2027, employers will have to report certain benefits in kind through payroll in real time. Income Tax on those benefits will be collected through PAYE as the benefits are provided, while the employer's Class 1A National Insurance liability will also move into real-time reporting and payment.

From April 2028, mandatory payrolling will extend to most other benefits.

With only around seven months until phase one begins, this is no longer a distant payroll change. Employers providing company cars, vans, fuel or medical benefits should be preparing now.

What is changing

Instead of waiting until after the tax year to report affected benefits on P11D forms, employers will include their taxable value in payroll and report them through the Full Payment Submission, or FPS.

For benefits within the mandatory regime:

Employees will pay Income Tax on benefits as they receive them, rather than relying primarily on later PAYE coding adjustments or year-end reconciliation.

Employers will report and pay Class 1A National Insurance in real time, rather than calculating the annual liability through P11D(b) and making one payment the following July.

Benefit reporting becomes an ongoing payroll responsibility, rather than primarily an end-of-year exercise.

Payroll therefore needs to know when a benefit starts, changes or ends — not several months later when the P11Ds are being prepared.

The timetable

HMRC confirmed in June 2026 that mandatory payrolling would be introduced in two phases.

From 6 April 2027

Phase one applies to:

• Company cars
• Car fuel
• Company vans
• Van fuel
• Employer-provided medical benefits

These benefits will need to be reported through payroll and RTI.

Employers will no longer use the normal year-end P11D process for these mandatorily payrolled benefits.

For benefits not yet within the mandatory regime, existing reporting arrangements will continue during 2027/28 unless the employer chooses to payroll them voluntarily.

From 6 April 2028

Mandatory payrolling will extend to most remaining benefits in kind.

This means 2027/28 will effectively be a transition year in which many employers operate two reporting methods side by side.

Loans and living accommodation

Two significant categories remain outside the mandatory timetable for now:

• Employment-related loans, including beneficial or interest-free loans
• Employer-provided living accommodation

HMRC has not yet confirmed when mandatory payrolling will apply to these benefits.

Employers will be able to payroll them voluntarily from April 2027, subject to registration with HMRC, but P11D and P11D(b) reporting will remain available where they are not voluntarily payrolled.

PAYE Settlement Agreements also continue under their existing rules.

The Class 1A cash-flow issue

This is one of the most important parts of the change for employers to understand.

Under the existing system, Class 1A National Insurance on taxable benefits is generally calculated after the end of the tax year and paid by 22 July.

From April 2027, Class 1A on benefits within phase one will instead be reported and paid in real time.

That creates a one-off overlap in 2027.

Consider an employer providing company cars.

During the 2027/28 tax year, the employer will begin paying Class 1A in real time on cars provided from April 2027.

But by 22 July 2027, the employer will still need to pay the Class 1A liability relating to benefits provided during 2026/27, under the existing annual P11D system.

So in the first quarter of 2027/28, the employer may be funding:

• the final annual Class 1A payment for 2026/27; and
• the first real-time Class 1A liabilities for 2027/28.

This is not additional tax.

It is a timing change: two different years' liabilities fall into a much tighter cash-flow window during the transition.

For employers with substantial company car or medical benefit programmes, the amount may be material.

It should be included in the 2027 cash-flow forecast now.

What employers need to get ready

Payroll software

Payroll software will need to support the new RTI reporting requirements.

From April 2027, the FPS will contain additional information relating to phase-one benefits so that HMRC can identify the benefit and the associated Income Tax and Class 1A National Insurance liability.

Employers should ask their payroll provider:

• whether their software will support mandatory payrolling from April 2027;
• when the relevant update will be available;
• what additional benefit information will be required; and
• how corrections and changes will be handled.

Do not assume that an ordinary payroll software update automatically deals with the operational changes required.

Benefit information

For many employers, this will be the bigger challenge.

Under the P11D system, benefit data could often be collected after the end of the tax year.

Real-time reporting makes that approach increasingly impractical.

Payroll will need timely information about events such as:

• a company car being allocated;
• an employee changing vehicle;
• fuel benefit starting or ending;
• an employee joining or leaving;
• private medical cover being added or removed; and
• the taxable value of an existing benefit changing.

For a larger employer, HR, fleet management, finance and payroll may all need to feed information into the process.

For a smaller business, the same information may be managed by only one or two people — but it still needs to reach payroll at the right time.

Estimated values

It will not always be possible to know the final taxable value of a benefit immediately.

Where necessary, employers will be able to use a reasonable estimate and adjust the benefit when better information becomes available.

If the taxable value changes during the year, the revised amount will generally need to be recalculated across the remaining pay periods.

HMRC is also developing an end-of-year adjustment process for estimated benefits.

The practical point is that payroll needs to support both in-year adjustments and an appropriate year-end correction process.

Employees need to understand the change too

The change will affect employees' payslips and, in some cases, their take-home pay.

The taxable value of a payrolled benefit will be taken into account when calculating PAYE, meaning the employee pays tax on the benefit in the year it is provided.

HMRC also intends to remove affected benefits from employees' tax codes ahead of mandatory payrolling so that the same benefit is not taxed twice.

However, some employees may still be repaying tax underpayments relating to benefits provided in an earlier year.

That can create the appearance that they are paying tax twice:

• tax on the current year's benefit through payroll; and
• an earlier year's underpayment through their tax code.

It is not double taxation, because the liabilities relate to different periods.

HMRC is specifically encouraging employers to explain this distinction clearly before April 2027.

Good communication should cover:

• which benefits will appear through payroll;
• why PAYE deductions may change;
• what happens to existing tax-code adjustments; and
• why a previous-year underpayment may continue alongside current-year benefit taxation.

Explaining this before the first affected payslip is far easier than dealing with a queue of employee queries afterwards.

What about voluntary payrolling?

Voluntary payrolling already exists, but the rules are changing alongside the mandatory regime.

The existing voluntary registration service closed on 5 April 2026.

A new registration window will open in November 2026 for employers wishing to payroll benefits that are not mandatory from April 2027.

This includes employment-related loans and living accommodation.

Employers wishing to use voluntary payrolling for the 2027/28 tax year will need to register by 5 April 2027.

It is important, however, not to assume that voluntary and mandatory payrolling will operate in exactly the same way.

HMRC has said that the voluntary service for non-mandated benefits will use a different reporting approach from the phase-one mandatory RTI process. Further details, including the treatment of Class 1A National Insurance for voluntarily payrolled benefits, are still being developed.

For that reason, voluntary payrolling should be considered primarily as an administrative and employee-tax decision rather than as a way of changing the timing of Class 1A liabilities.

Corrections and year-end adjustments

Real-time reporting does not mean every benefit value has to be known perfectly from day one.

Where an employer later discovers that an estimated taxable value was wrong, HMRC's interim guidance allows corrections to be made.

During the year, the revised value can generally be spread across the remaining payroll periods.

HMRC also expects to allow certain end-of-year adjustments by correcting the final FPS after the tax year.

The final deadline for that correction process has not yet been confirmed, although HMRC currently expects it to fall before 19 July following the end of the tax year.

This is another reason employers should not design their process around today's P11D timetable. The year-end process will still exist, but it will increasingly be a correction mechanism, rather than the main reporting method.

The first year comes with some penalty protection

HMRC recognises that this is a significant change.

For 2027/28, employers making non-deliberate inaccuracies in RTI returns relating to mandatory payrolling will not normally face inaccuracy penalties.

That easement does not cover deliberate non-compliance.

Existing penalties for late RTI filing and late payment will also continue to apply, together with statutory late-payment interest.

So the first year provides some protection for genuine mistakes — but not for failing to implement the new process.

What to do now

HMRC is already encouraging employers to begin preparing.

1. List the benefits you provide

Identify everything currently reported through P11D or P11D(b).

Separate:

Phase one — April 2027

• cars;
• car fuel;
• vans;
• van fuel; and
• medical benefits.

Later phases

Everything else.

2. Speak to your payroll provider

Ask when their software will support the new phase-one RTI requirements and what information they will need from you.

3. Map your benefit information flow

Work out where information currently comes from and how quickly it reaches payroll.

If the current process is essentially:

"Finance prepares a spreadsheet after the year end"

it needs redesigning.

4. Model the Class 1A overlap

Look at the Class 1A liability paid in July 2026 and your expected July 2027 payment.

Then model the additional real-time Class 1A cash outflow beginning from April 2027.

For some businesses this will be immaterial.

For others it will be one of the more noticeable payroll cash-flow changes of the year.

5. Review loans and accommodation

If you provide either, decide whether you intend to keep using P11D reporting or consider voluntary payrolling from April 2027.

If voluntary payrolling is preferred, the registration service is expected to open in November 2026.

6. Plan employee communications

Employees should understand what will change before the first affected payslip.

Pay particular attention to anyone who is still repaying an earlier tax underpayment through their PAYE code.

7. Watch for final HMRC guidance

The guidance currently available is interim.

HMRC expects final phase-one guidance and further legislation around Autumn Budget 2026.

Processes designed now should therefore leave enough flexibility to incorporate the final technical rules.