Phased introduction of mandatory payrolling

With less than a year to go, there has been a further change to the mandatory payrolling timetable. Rather than payrolling becoming mandatory from 06^th April 2027 for all benefits other than taxable employment-related loans and living accommodation benefits, it will not be introduced in stages. Mandatory payrolling will apply to benefits in the first phase from 06^th April 2027. Phase 2 will see the remaining benefits (other than employment-related loans and living accommodation benefits for which payrolling will become voluntary) bought within mandatory payrolling from April 2028. This is not the first time the timetable has changed (mandatory payrolling was originally to apply from April 2026).

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Phase 1

 The following benefits are in the first phase and will be subject to mandatory payrolling from 06^th April 2027:

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

Phase 2

The second phase will apply to benefits in kind not in phase 1, other than employment-related loans and living accommodation benefits. Mandatory payrolling will apply to benefits in phase 2 from 06^th April 2028.

Employers will be able to opt to payroll employment- related loans and living accommodation benefits from 06^th April 2028 onwards if they register to do so before the start of the 2028/29 tax year.

What is payrolling

 As the name suggests, under payrolling, employers deal with taxable benefits in kind through the payroll. Currently, this is voluntary and available for all benefits in kind other than employment-related loans and living accommodation benefits. To payroll benefits for 2026/27 and earlier tax years, employers needed to register to payroll them before the start of the tax year.

Where a benefit is payrolled, it’s taxable amount is treated like additional pay which is paid at the same frequency as the employee’s cash pay. The taxable amount will normally be the cash equivalent value unless the benefit is made available through an optional remuneration arrangement (such as salary sacrifice arrangement) and the alternative valuation rules apply. The payrolled amount is included in gross pay for tax purposes and the tax on the total gross pay is deducted from the employee’s cash pay. In this way, the employee pays tax on the payrolled benefit through the payroll.

Example

 An employee has a company car with a list price of £30,000. For 2026/27 the appropriate percentage is 30%. The employee is paid monthly. The employer does not provide fuel for private motoring in the company car. The employer opts to payroll the company car benefit in 2026/27.

The cash equivalent of the company car is treated as additional salary of £9,000 a year paid to the employee in monthly instalments of £750. This is included in the employee’s gross pay for the month is deducted from the employee’s cash salary.

As most benefits in kind are within the scope of Class 1A rather than Class 1, the payrolled benefit is not included in gross pay for National Insurance purposes. Currently, Class 1A National Insurance on both payrolled benefits and those reported on the P11D are reported to HMRC on form P11D (b).

Changes under mandatory payrolling

Employers will not need to register to payroll benefits for which payrolling is mandatory. Employers will need to payroll company cars and vans, car and van fuel benefits and medical benefits from 06^th April 2027 regardless of whether they are already payrolling them voluntary.

For 2027/28 payrolling will remain voluntary for benefits which are not in phase 1 and employers will only be able to payroll these if they have registered to do so. Benefits which are not payrolled voluntarily will continue to be reported to HMRC on the P11D.

From 06^th April 2028, employers will only be able to choose whether to payroll employment-related loans and living accommodation benefits as all other benefits will be within mandatory payrolling. Employers who wish to payroll these benefits will need to register with a new voluntary registration service prior to the start of the tax year in order to do so.

Class 1A National Insurance

 One of the major changes associated with the introduction of mandatory payrolling is the way in which Class 1A National Insurance on benefits in kind is reported and paid. Currently, the same process applies regardless of whether a benefit in kind is payrolled or reported to HMRC on the P11D.

For 2026/27 and earlier tax years, the Class 1A National Insurance liability benefits in kind provided in the tax year is computed on the P11D (b), which like the P11D’s must be filed electronically by 06^th July after the end of the tax year. This means that even if the employer payrolls all taxable benefits provided to the employees, they still need to submit a P11D (b).

Class 1A National Insurance on benefits in kind is currently payable after the end of the tax year, once the P11D (B) has been filed. The payment deadline is 22^nd July after the end of the tax year where payment is made electronically or 19^thJuly after the end of the tax year where payment is made by cheque.

Under mandatory payrolling both the reporting and payment of Class 1A National Insurance will move in-year. As is currently the case for Class 1A National Insurance on taxable sporting testimonials, Class 1A National Insurance on benefits within mandatory payrolling will be reported on the Full Payment Submission (FPS) for the month and paid over to HMRC with the PAYE and Class 1 National Insurance for the tax month. This will mean that under mandatory payrolling, Class 1A National Insurance will be paid in monthly instalments throughout the tax year rather than in a lump sum after the end of the tax year. This will accelerate the payment and have negative cashflow implications for employers.

Under the previous timetable, this would have applied for all benefits other than employment-related loans and living accommodation benefits which the employer had not opted to payroll from 06^th April 2027.

However, under the phased approach, only the phase 1 benefits are within mandatory payrolling from 06^th April 2027 (although employers will be able to payroll phase 2 benefits voluntarily). However, following the announcement of the phased introduction HMRC have stated that they will ‘continue to work with stakeholders and industry experts to resolve outstanding issues, including the potential to introduce voluntary Class 1A reporting for non-mandated benefits. Further guidance is due to be published in due course.

The phased introduction will mean that employers who provide both phase 1 benefits and 2 benefits which they do not elect to payroll in 2027/28 will pay some Class 1A National Insurance in-year and some after the end of the year. This will increase their compliance burden. From 2027/28 on which Class 1A National Insurance is paid and reported in-year will not need to be taken into account in working out the Class 1A liability on the P11D (b).

P11D’s and P11D (b)

 The previous timetable which bought all benefits other than employment-related loans and living accommodation benefits within mandatory payrolling from 06^th April 2026 would have rendered the P11D and the P11D (b) obsolete from 2027/28 save where the employer chose not to payroll employment-related loans and/or living accommodation benefits.

The move to a phased introduction grants the forms a stay of execution as they will continue to be the mechanism by which employers report phase 2 benefits which they do not choose to payroll voluntarily in 2027/28. From 2028/29, the P11D and P11D (b) will only be used where an employer opts not to payroll employment-related loans and/or living accommodation benefits.

P46 (Car)

 Form P46 (Car) is used by an employer to tell HMRC when they have provided a company car to an employee, stopped providing a company car to an employee and they do not payroll company car benefits. Where company cars are payrolled, changes are notified to HMRC on the FPS.

As company cars are phase 1 benefits, they must be payrolled from 06^th April 2027 onwards. This will render the P46 (Car) obsolete.