Benefits in kind: Introduction of mandatory payrolling to be phased

For subsequent years, employment-related loans (including notional loans that can arise with certain employee share plans) and employer provided living accommodation can continue to be payrolled voluntarily, or reported on Form P11D, unless and until, payroll reporting is mandated for those benefits.

HMRC will continue engaging with stakeholders over the summer with the aim of resolving outstanding issues (including the potential for voluntary Class 1A NIC reporting for non-mandated benefits, as well as guidance on any interaction between mandatory payrolling of benefits for employees on a modified payroll). Further technical guidance is expected to be issued by July 2026, with final guidance published alongside the 2026 Budget.

What should employers consider now?

The key issues and challenges preparing for mandatory payrolling set out in our earlier article continue to apply. In addition, we recommend that you now:

• Review priorities – how will you make most effective use of your additional time? Some of the benefits mandated from 2027/28 are the most complex (e.g. company cars) and you should therefore consider whether you can refocus preparations away from benefits that won’t be mandated until 6 April 2028 (without risking future readiness) to ensure you are compliant from 6 April 2027;
• Manage compliance in 2027/28 – should you maintain P11D reporting for non-mandated benefits and taxable expenses during this transitional year or is this going to over-complicate system changes and provider/employee communications and understanding? Additionally, HMRC’s new phased approach means that for 2027/28 employers will potentially have real time reporting and Class 1A NIC on mandated benefits, but annual Class 1A NIC via the P11D(b) for other benefits and taxable expenses. Whilst HMRC are considering whether it is possible to report Class 1A on P11D benefits through the payroll, it will be important to consider the cash flow issue associated with reporting Class 1A NIC via Form P11D(b); and
• Keep your people informed – how you decide to proceed should be clearly communicated to your workforce. If you have already started to communicate with your workforce, changing messaging and different tax collection methods across benefits introduces complexity. However, if organisations choose to payroll all benefits from 2027/28, this may have an impact on employee cashflow. As such, this decision should be carefully evaluated, with due consideration given to employee perspectives. It’s important to ensure your communications are consistent and clear.

In summary, whilst employers may welcome the easement from HMRC, there will be a need to revisit your strategy and consider employee viewpoints in relation to the decisions you need to make on how best to manage compliance in the transitional year.

How KPMG can help

KPMG’s employment tax specialists are working closely with employers across all sectors to ensure their systems, processes and underlying data are ready for the transition to mandatory real time reporting for benefits in kind and taxable expenses. Please speak to your usual KPMG in the UK contact to talk through how KPMG can support your organisation with its mandatory payrolling preparations.

For further information please contact:

• Eloise Knapton
• Caroline Laffey