Each year, employers gather company car details, medical insurance renewals and fuel card statements for the P11D, which is due by 6 July.
From 6 April 2027, reporting benefits in kind through payroll software stops being optional and becomes the law, phased in over two years. HMRC published the confirmation in its policy paper on mandatory reporting of benefits in kind in Real Time Information, alongside interim guidance and draft legislation.
HMRC presents it as an administrative simplification. For an owner-managed limited company where the director has a car and three people have private medical cover, it means a new monthly job, explaining payslip changes to staff and, for some directors, a tax deduction larger than PAYE rules allow in one month.
What has been announced
The change is being introduced in two phases.
Phase one, from 6 April 2027 to 5 April 2028, covers five benefits only: company cars, car fuel, vans, van fuel and employer provided medical benefits. Those must be reported through the Full Payment Submission, the same submission you already use to tell HMRC what you have paid people, with both income tax and Class 1A National Insurance reported in real time.
Phase two, from April 2028, brings in most remaining benefits in kind. Two are carved out and stay voluntary: employment related loans and living accommodation. HMRC has said a timetable for those will be set out separately.
Most employers will no longer need to complete a P11D or a P11D(b) at all. The forms survive, temporarily, only for loans and accommodation. If your July filing is a car and a medical policy, your last P11D covers the 2026 to 2027 tax year and is filed by 6 July 2027.
Cars, fuel, vans and medical cover are the main benefits most trading companies provide, so the first phase covers almost every owner-managed business we act for. Loans and accommodation, the more complex benefits, are left until later.
What changes for the employee
The amount of tax stays the same. The taxable value of a company car is calculated exactly as it is now, list price multiplied by the appropriate percentage. Class 1A National Insurance is charged on the same figure at the same rate, 15 per cent for 2026 to 2027.
The timing and method of payment change. Today, an employee with a benefit typically pays the tax through an adjusted tax code, often a year or more after the benefit was given, in an amount they cannot easily trace. Under payrolling, the taxable value is added to their pay in twelve monthly slices and the tax comes off that month's payslip.
Employees will have questions, because a payslip showing taxable pay several hundred pounds above the salary can look like a mistake. Explain the change to staff before the first changed payslip.
Worked example: one director, one electric car, three medical policies
Take an illustrative trading company, with numbers chosen so the arithmetic is easy to follow. It has one director on a salary of £12,570, taking the rest of their income as dividends, a fully electric company car with a list price of £42,000, and private medical cover for the director and two employees, costing the company £1,150, £780 and £690 a year.
For 2026 to 2027 the appropriate percentage for a car producing zero emissions is 4 per cent. So the car benefit is £42,000 × 4% = £1,680.
| Benefit | Taxable value | Class 1A at 15% |
|---|---|---|
| Director — electric company car | £1,680 | £252.00 |
| Director — private medical | £1,150 | £172.50 |
| Employee A — private medical | £780 | £117.00 |
| Employee B — private medical | £690 | £103.50 |
| Total | £4,300 | £645.00 |
Under the current rules that £645 is one payment, due by 22 July 2027 for the 2026 to 2027 year, and the company has had the benefit of the money in the meantime. Under real time reporting the same £645 is reported as the year goes along, in twelve pieces of roughly £53.75 a month, sitting on top of the PAYE bill the company already pays.
A cost that was paid once a year, after the year end, is now paid monthly during the year. For a larger car the figure rises quickly: a £60,000 petrol car at a 30 per cent appropriate percentage is an £18,000 benefit and £2,700 of Class 1A on its own. Any business with more than a couple of vans should put a figure on this before April 2027, and a monthly management accounts pack should carry it as its own line.
The 50 per cent limit for owner-directors
PAYE has an overriding limit: the tax deducted in a pay period cannot exceed 50 per cent of the cash pay in that period. Payrolled benefits increase taxable pay without adding any cash to the pay run. A director on the standard optimised salary of £12,570 — that is £1,047.50 a month, of which no more than about £523 can be taken in tax — with a substantial car benefit loaded on top can run into that ceiling.
HMRC's guidance is clear on what happens: the employer carries the uncollected amount forward into later pay periods in the same tax year, and anything still uncollected at the year end is picked up by HMRC through the P800 reconciliation. The director then receives an underpayment notice, even though they may have assumed the payroll had dealt with it.
Check this in advance. Take the benefit values, divide by twelve, add to the monthly taxable pay, and check the resulting deduction against half the cash salary. If it does not fit, the salary and dividend split needs revisiting before April 2027.
The one-year penalty easement
HMRC has acknowledged that a first year on a new process produces mistakes. The draft legislation includes a power to modify how Schedule 24 of the Finance Act 2007 applies, so that penalties are not charged for non-deliberate inaccuracies for a limited period of one year.
The easement covers getting a figure wrong. Failing to report is still penalised. There is also a correction route after the year end: where the update process is used, all benefits in kind must be reported by 6 July following the end of the tax year, and any additional Class 1A National Insurance is payable by 22 July.
Five things to do before April 2027
- Write down every benefit you provide, today. Include anything arranged since last year's P11D that your accountant has not been told about. Car, fuel, vans, medical, gym, phones, staff parties over £150 a head. Phase one only needs five of them, but phase two needs the rest a year later.
- Check your payroll software handles it. Every major provider is building this, but it may not be in the version you are running yet. Ask the supplier for the release date in writing. Our payroll and pensions clients are on software where this is already live for voluntary payrolling.
- Run the 50 per cent test on every director. Monthly benefit value against monthly cash pay. If the deduction exceeds half the cash, revisit the salary and dividend split before April 2027.
- Consider payrolling voluntarily first. Voluntary payrolling exists now and registration has to be done before the start of the tax year it applies to. Starting voluntarily lets you learn the process on your own timetable while the P11D is still available as a fallback.
- Tell your staff in writing before the first payslip changes. One paragraph: your benefit is now taxed monthly instead of through your tax code, your take-home may drop slightly, the total tax is unchanged.
Keeping payroll informed about benefits
Payroll software will handle the reporting. Problems are more likely to come from missing information, because real time reporting means the payroll needs to know about a benefit in the month it changes rather than in the July after the year it changed.
A car swapped in October, a medical policy renewed in January with three new joiners on it, a van reallocated between two employees in the spring: under the annual system all of that could be reconstructed at year end from invoices. Under real time reporting it has to reach the payroll within the month from whoever arranged it. If your bookkeeping is done in arrears, bring your bookkeeping up to date before April 2027.
Once benefits run through the payroll monthly, the true cost of employing each person appears in your accounts every month instead of in one payment in July, with salary, employer's National Insurance, pension, benefits and Class 1A recorded in the month they were incurred. Our virtual finance team works from that monthly figure.
Before April 2027, decide on your payroll software, director salary levels and who tells payroll about changes to benefits.