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Employer National Insurance is charged at 15% on the taxable value of most benefits in kind for the 2026-27 tax year, and from 6 April 2027 payrolling company cars, car fuel, vans, van fuel and private medical benefits stops being a choice and becomes a legal requirement ([5]). Those two facts reshape how every UK employer that provides perks must run its payroll.
Payrolling benefits in kind means taxing a company benefit through the payroll each pay period, in real time, rather than reporting it once a year on a P11D form ([1]). The value of the benefit is added to the employee's taxable pay, Income Tax is deducted as the benefit is enjoyed, and the annual P11D return for that benefit disappears. The employer National Insurance charge, known as Class 1A, still has to be accounted for separately ([3]).
This guide explains what a benefit in kind is, how payrolling works step by step, which benefits can and cannot be payrolled, how Class 1A National Insurance is handled, the deadlines that matter, and the reform that turns a voluntary process into a mandatory one from April 2027. It is written for employers, finance teams and the payroll bureaux that run schemes on their behalf.
Key takeaways
- Payrolling a benefit adds its taxable value to pay each period so Income Tax is collected in real time, removing the need for a per-employee P11D for that benefit.
- Class 1A National Insurance, charged at 15% for the 2026-27 tax year, is still due whether a benefit is payrolled or reported on a P11D.
- An employer must register to payroll benefits before the start of the tax year, and the current voluntary registration must be in place before 6 April.
- From 6 April 2027, payrolling becomes mandatory for company cars, car fuel, vans, van fuel and private medical benefits.
- Employer-provided loans and living accommodation stay outside the mandatory rules and can only be payrolled voluntarily.
What a benefit in kind actually is
A benefit in kind is something of value an employer gives an employee or director on top of salary, where the value is not paid in cash ([2]). Common examples include a company car available for private use, private medical insurance, an interest-free or low-interest loan above a threshold, and living accommodation. Because these carry a monetary value, HMRC treats most of them as taxable and expects the tax to be collected ([13]).
The taxable value is not always the amount the employer spends. For a company car, the taxable figure is the list price of the vehicle multiplied by an appropriate percentage set by its carbon dioxide emissions, not the lease cost the employer pays ([9]). For private medical cover, the taxable value is the cost to the employer of that employee's policy ([2]). Getting the taxable value right is the foundation of the whole process, because every downstream figure flows from it.
Not everything an employer provides is taxable. Business travel reimbursed at HMRC benchmark rates, work telephones used only for business, professional training and standard work equipment are all exempt and do not need to be reported at all ([13]). The exemptions matter because an employer that payrolls an item which was never taxable creates an overpayment it then has to unwind.
How payrolling benefits in kind works
Payrolling replaces the once-a-year P11D route with a running calculation inside each payrun. The mechanics are consistent across benefit types, even though the taxable values are worked out differently.
The cash equivalent and the notional pay calculation
The employer starts with the annual taxable value of the benefit, sometimes called the cash equivalent ([1]). That figure is divided by the number of pay periods left in the tax year, and the resulting amount is added to the employee's taxable pay each period as notional pay ([2]). Notional pay increases the amount of pay that is taxed, but it is not money that reaches the employee's bank account, so it does not change gross cash wages.
Take a private medical policy with a cash equivalent of £1,200 for the year, payrolled across twelve monthly runs. The employer adds £100 of notional pay to taxable pay each month, and the employee pays Income Tax on that £100 at their marginal rate ([1]). A basic-rate taxpayer therefore sees around £20 more Income Tax per month, spread evenly, instead of a tax-code adjustment or a bill after the year ends ([11]).
Income Tax collected in real time
Because the notional pay sits inside taxable pay, the Income Tax due on the benefit comes out through the normal Pay As You Earn calculation on each payslip ([1]). This is the central advantage of payrolling: the employee pays the right amount of tax during the year the benefit is enjoyed, rather than through a tax-code deduction based on an estimate from a previous year ([7]).
When an employer payrolls a benefit, HMRC removes that benefit from the employee's tax code so the person is not taxed twice ([7]). Employers should still explain the change to staff, because a payslip that shows higher taxable pay than cash pay can look wrong to an employee who has never seen notional pay before ([11]).
What still has to happen at year end
Payrolling removes the P11D for the benefits that are payrolled, but it does not remove every year-end obligation ([2]). The employer must still submit a P11D(b) to report and pay the total Class 1A National Insurance due on all benefits, whether they were payrolled or not ([3]). The employer must also give each employee a written statement of the benefits that were payrolled, so the employee has a record for their own tax affairs ([1]).
Class 1A National Insurance on benefits
Class 1A National Insurance is the employer charge on most benefits in kind, and it is one of the most misunderstood parts of the system ([3]). It is paid only by the employer, never by the employee, and it applies to the taxable value of the benefit at the employer secondary rate ([4]).
For the 2026-27 tax year the employer secondary rate is 15%, which is also the Class 1A rate ([4]). An employer providing a car with a cash equivalent of £6,000 therefore owes £900 of Class 1A on that single vehicle for the year ([9]). Payrolling the Income Tax does not remove this charge; the Class 1A figure is still totalled and reported on the P11D(b) ([3]).
The table below sets out how the two liabilities sit against the two reporting routes for the 2026-27 tax year.
| Element | Payrolled benefit | P11D benefit |
|---|---|---|
| Income Tax on the benefit | Collected each pay period through PAYE | Collected through the tax code after year end |
| Per-employee P11D | Not required for that benefit | Required |
| P11D(b) for Class 1A | Still required | Still required |
| Class 1A rate 2026-27 | 15% on cash equivalent | 15% on cash equivalent |
The point the table makes is simple: payrolling changes how Income Tax is collected, but the employer National Insurance charge is identical either way ([3]). An employer choosing between the two routes is choosing an Income Tax mechanism and an administrative burden, not a National Insurance saving ([4]).
Which benefits can and cannot be payrolled
Most benefits can be payrolled, but two long-standing exceptions have shaped how employers plan ([1]). Under the current voluntary rules, employer-provided living accommodation and beneficial loans cannot be payrolled and must still go on a P11D ([2]). Everything else, from company cars to medical insurance to gym membership, is eligible ([13]).
The company car sits at the centre of most payrolling schemes because it is the highest-value benefit for many employers ([10]). Its taxable value is the list price multiplied by the appropriate percentage for the vehicle's emissions, and a capital contribution from the employee of up to £5,000 reduces that list price before the percentage is applied ([9]). Fuel provided for private mileage is a separate benefit with its own charge, which is why the reform lists car fuel and van fuel as distinct items ([10]).
The following table shows how several common benefits are treated for reporting purposes for the 2026-27 tax year.
| Benefit | Can be payrolled now | Class 1A due |
|---|---|---|
| Company car (private use) | Yes | Yes, 15% |
| Car or van fuel for private use | Yes | Yes, 15% |
| Private medical insurance | Yes | Yes, 15% |
| Company van (private use) | Yes | Yes, 15% |
| Beneficial loan over £10,000 | No, P11D only | Yes, 15% |
| Living accommodation | No, P11D only | Yes, 15% |
| Work phone, business only | Exempt, not reported | No |
Reading the table, an employer can see that the exemptions and the loan and accommodation carve-outs are the only real constraints ([2]). For the large majority of perks, payrolling is available today and becomes compulsory for the headline categories from April 2027 ([6]).
Registering and the deadlines that matter
Payrolling is not something an employer can start mid-year on a whim. Under the current voluntary process, the employer must register with HMRC before the start of the tax year in which the benefits will be payrolled, and registration for a given tax year is not available once 6 April has passed ([1]). Registering early gives HMRC time to adjust employees' tax codes before the year begins so benefits are removed cleanly ([7]).
The P11D calendar still governs anything that is not payrolled, and it is unforgiving. The deadlines below apply to benefits provided in a tax year ending on 5 April ([2]).
| Action | Deadline after tax year end |
|---|---|
| Submit P11D and P11D(b) to HMRC | 6 July |
| Give employees their benefit statements | 6 July |
| Pay Class 1A National Insurance (electronic) | 22 July |
| Pay Class 1A National Insurance (post) | 19 July |
| Pay tax and Class 1B under a PSA | 22 October |
Missing the 6 July filing deadline for a P11D(b) triggers an automatic penalty of £100 for every 50 employees, for each month or part month the return is late ([3]). Late payment of Class 1A adds interest and further penalties on top ([4]). Employers running payroll on HMRC-recognised payroll software for SMEs usually get automated reminders for these dates, but the legal responsibility sits with the employer either way ([2]).
The PAYE Settlement Agreement alternative
For minor, irregular or hard-to-allocate benefits, an employer can use a PAYE Settlement Agreement instead of a P11D or payrolling ([12]). Under a PSA the employer settles the tax and a separate Class 1B National Insurance charge in a single annual payment, and the employee sees nothing on their own record ([12]). A PSA is useful for staff entertainment or small gifts, but it is not a substitute for payrolling a regular benefit such as a company car ([2]).
Payrolling compared with the P11D route
The choice between payrolling and the P11D has, until now, been a genuine decision for employers. Understanding the trade-off explains why HMRC is moving the whole system towards payrolling ([15]).
Why employers move to payrolling
Payrolling spreads the tax across the year, which employees often prefer to a lump-sum tax-code adjustment that can arrive a year in arrears ([7]). It also removes the annual P11D form for each affected employee, cutting the year-end workload for the payroll team ([1]). For an employer with dozens of company cars, that is a meaningful reduction in forms and in the errors those forms invite ([2]).
Why some employers have held back
The main reason employers have stayed on the P11D route is that payrolling demands accurate benefit data inside every payrun, not once a year ([7]). A mid-year change to a company car or a medical policy must reach the payroll team in time for the next run, which requires a tighter information flow between HR, finance and payroll ([8]). Accountants and payroll bureaux managing this across many clients tend to rely on a multi-client payroll dashboard that flags benefit changes per scheme so nothing is missed ([1]).
What changes from April 2027
The voluntary picture is ending for the biggest benefits. From 6 April 2027, payrolling becomes mandatory for company cars, car fuel, vans, van fuel and employer-provided private medical benefits ([5]). For those benefits, Income Tax and Class 1A National Insurance will have to be reported through the Full Payment Submission each pay period and paid in real time, rather than through the annual P11D and P11D(b) route ([6]).
Employers will not need to register to payroll the mandatory benefits, because payrolling becomes the default for them ([7]). HMRC will automatically remove those benefits from employees' tax codes ready for the start of mandatory payrolling ([7]). Employers who also want to payroll non-mandatory items, including loans and accommodation, will still need to register through a service that reopens in November 2026, with a deadline of 5 April 2027 ([7]).
A one-off cash flow point deserves attention. In July 2027 employers will still owe Class 1A on benefits provided in the 2026-27 tax year under the old P11D system, while also paying Class 1A in real time on benefits from April 2027 onwards, creating a temporary overlap of two Class 1A liabilities in the same year ([7]). Software platforms that embed payroll through an HMRC-recognised payroll API will handle the new Full Payment Submission fields automatically, which is where the real integration work sits for developers ([6]).
Getting benefit reporting ready
An employer preparing for real-time benefit reporting should start with a list of every benefit it provides and which ones would normally appear on a P11D ([7]). That list shows what will need to be payrolled and where the data will come from each period. The information flow from HR and benefit providers into payroll is usually the weakest link, and it is the part HMRC specifically warns employers to test early ([8]).
Payroll software also has to be capable of the extra Full Payment Submission data and compliant with HMRC's requirements ([7]). An occasional employer running a single payslip a month has different needs from a bureau processing hundreds, but both need the calculation and the submission to be correct. A sole trader taking on a first member of staff can start with an instant HMRC-compliant payslip and grow into full benefit reporting as the team expands ([2]).
Check the take-home impact before you switch
Because payrolling changes the tax on each payslip, an employer should model the effect on take-home pay before enabling it, so staff are not surprised by a higher tax deduction. The Moonworkers tax code checker shows how a benefit adjustment feeds through a tax code and into the Income Tax on a payslip.
On your payslip, P45 or P60. Suffixes W1, M1 or X welcome.
What you'll get
Enter any UK tax code to see:
- · what each letter and number means
- · which nation's rates apply (S and C prefixes)
- · cumulative vs emergency W1/M1/X basis
- · the exact tax-free pay for every pay schedule, to the penny
Try 1257L, a K code, or an emergency W1 code.
Payroll that applies every tax code correctly
Moonworkers runs the full HMRC exact percentage method on every payslip, including K codes, emergency codes and in-year code changes, and files RTI automatically.
Conclusion
Payrolling benefits in kind is, at its core, a timing change: the tax on a perk is collected as the perk is enjoyed rather than a year later through a tax code. The employer National Insurance charge is unaffected, the P11D(b) survives, and the accuracy of the underlying taxable value remains the thing that determines whether the numbers are right. What has changed is that the voluntary era is closing for the largest benefits.
From April 2027 the direction of travel is clear, and it points towards benefits sitting inside real-time payroll alongside salary, reported through the same Full Payment Submission that already carries Pay As You Earn and National Insurance. Employers that tighten their benefit data now, and the platforms that embed payroll compliance for them, will move through the transition with the least friction.
Frequently asked questions
Do I still need to file a P11D if I payroll benefits in kind?
Not for the benefits that are payrolled. Payrolling removes the per-employee P11D for those items, because the Income Tax is collected through payroll instead ([1]). An employer must still submit a P11D(b) to report and pay the total Class 1A National Insurance, and must give each employee a statement of the payrolled benefits ([3]).
Does payrolling a benefit reduce the National Insurance an employer pays?
No. Class 1A National Insurance is due at the same 15% rate for the 2026-27 tax year whether the benefit is payrolled or reported on a P11D ([4]). Payrolling changes only how the employee's Income Tax is collected, not the employer's National Insurance liability ([3]).
When must an employer register to payroll benefits?
Under the current voluntary rules, registration must be completed before the start of the tax year, and it cannot be done once 6 April has passed for that year ([1]). From April 2027 no registration is needed for the mandatory benefits, but voluntary registration for other benefits reopens in November 2026 with a 5 April 2027 deadline ([7]).
Can company cars and private medical insurance be payrolled?
Yes. Both are eligible for payrolling now, and both become subject to mandatory payrolling from 6 April 2027, along with car fuel, vans and van fuel ([5]). Employer-provided loans and living accommodation are the main exceptions and remain voluntary ([6]).
