Every July, a particular kind of email goes out from accountants to clients. It asks for the car details, the medical insurance renewal, the fuel card statement, and it asks for them urgently, because the P11D deadline is 6 July and nobody thinks about benefits in kind for the other eleven months of the year.
That annual scramble is being abolished. 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.
It has been reported as an administrative simplification, which is how HMRC has framed it. For a company with a payroll department it probably is. For an owner-managed limited company where the director has a car and three people have private medical cover, it is something else: a monthly job that did not exist before, a payslip conversation with staff, and for some directors, a tax deduction that will not fit.
What has actually been announced
The change is being introduced in two phases, and the first one is narrower than the headlines suggest.
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.
The consequence for paperwork is the headline everyone quotes: 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. After that, nothing.
Look at that phase one list again, though, because there is a joke buried in it. Cars, fuel, vans and medical cover is not a random selection. It is, more or less, the complete benefits schedule of the average trading company in this country. The "narrow" first phase captures almost every owner-managed business we act for, while the genuinely complex benefits — the loans, the accommodation — sit it out.
What changes for the employee, and what does not
Nothing about the amount. 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. Nobody pays more tax because of this measure.
What changes is when and where. 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.
That is better. It is also going to generate questions, because a payslip that suddenly shows a taxable pay figure several hundred pounds above the salary looks, to someone who has not had it explained, like a mistake. Every employer who has voluntarily payrolled benefits has had this conversation. Doing it in March 2027 is a five-minute email. Doing it in reply to an angry message on 30 April 2027 is not.
Worked example: one director, one electric car, three medical policies
Take an illustrative trading company — not a client, and the numbers are chosen so the arithmetic is easy to follow. 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. 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.
Six hundred and forty-five pounds is not a crisis. The point is not the size of it, it is that a line which used to arrive once a year, forecastable and late, now arrives monthly and early. Multiply the car up — 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 — and it stops being rounding. Any business with more than a couple of vans should put a figure on this before April 2027 rather than after, which is exactly the kind of thing a monthly management accounts pack should be carrying as its own line.
The trap for owner-directors: the 50 per cent limit
Here is the part that will catch people, and it catches precisely the structure most small company directors use.
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 putting a penny of extra cash in the pay run. So 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. Nothing is lost. But it means an underpayment notice landing on a director who assumed the payroll had dealt with it, which is a poor way to find out.
The fix is arithmetic done 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 — a conversation that belongs in tax planning rather than in a payroll run.
The one-year penalty easement, and what it does not cover
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.
That is a genuine easement and worth knowing about. It is not an amnesty. It covers getting a figure wrong; it does not cover not reporting. 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. Not the ones on last year's P11D — the actual list, including the thing somebody arranged in February and nobody told the accountant 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 "on the roadmap" and "in the version you are running" are different things. 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, you have a decision to make and eight months to make it.
- Consider payrolling voluntarily first. Voluntary payrolling exists now and registration has to be done before the start of the tax year it applies to. Going first, on your own timetable, with the P11D still available as a fallback, is a much better place to learn than being pushed in.
- 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. Sent in March, it prevents the whole problem.
Where this actually goes wrong
Not in the reporting. Payroll software will do the reporting. It goes wrong in the data, because real time 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 and a good memory. Under real time reporting it has to reach the payroll within the month, every month, from whoever arranged it. That is a process change in the business, not a software change — and it is the reason the mess will show up in companies where the bookkeeping is done in arrears. If that describes you, sorting the underlying bookkeeping is the real preparation, not choosing a payroll product.
There is also a quiet upside worth naming. Once benefits run through the payroll monthly, the true cost of employing each person appears in your accounts every month instead of arriving as a lump in July. Salary, employer's National Insurance, pension, benefits, Class 1A — all in one place, in the month it was incurred. That is a genuinely better number to run a business on, and it is the basis of everything our virtual finance team does.
April 2027 sounds far away. It is two payroll year-ends and one P11D season from now, and the decisions that matter — software, salary levels, who tells payroll what — all need making before it arrives.