Mandatory payrolling of benefits in kind: modernisation, but employers need more than payroll support

Payroll has always been about much more than processing payslips. Increasingly, payroll sits at the centre of employment tax, pensions, workforce planning, technology and compliance.

Over the coming years, employers will face some of the most significant workplace changes in a generation, including the introduction of mandatory payrolling of benefits in kind.

My aim is not simply to examine policy, but to explore what these changes may mean in practice, where opportunities may arise, where challenges may emerge and how employers can begin preparing for the future.

From April 2027, employers will be required to payroll benefits such as company cars, van benefits, fuel benefits and private medical insurance, with most remaining benefits expected to follow from April 2028. HMRC's objective is to modernise reporting and move taxation closer to real-time reporting - although we still don’t have all the detail we need, especially around the voluntary part and Class 1A National Insurance.

As a payroll professional, I support the direction of travel. Many employees have experienced the frustration of receiving an unexpected tax adjustment months after the end of the tax year. Mandatory payrolling should provide greater transparency and ensure tax is collected much closer to the point at which the benefit is received. The principle of paying the right tax at the right time is difficult to argue against.

However, whilst reporting may move into payroll, employers should be careful not to confuse payroll administration with employment tax advice.

Payroll is only one part of the puzzle

One of the biggest misconceptions surrounding mandatory payrolling is that payroll teams will somehow become responsible for all benefit-related decisions, although for some smaller businesses this may be true.

In reality, payroll is often the final stage in the process and before anything reaches payroll, employers must determine:

• Whether a benefit is taxable
• Whether an exemption applies
• How the benefit should be valued
• Whether National Insurance applies
• What records must be maintained
• How any risk should be managed

These are employment tax questions. Once those decisions have been made, payroll's role is to process and report the benefit correctly.

Why specialist tax advice matters

This is where employers may face challenges.

Many payroll professionals have extensive experience in operating PAYE, National Insurance and Real Time Information reporting requirements. However, determining the underlying tax treatment of a benefit can require specialist expertise.

Questions such as ‘is a double-cab pick-up a van or a car?’, or ‘what are the tax implications of changing an existing arrangement?’ can have significant tax consequences.

At Armstrong Watson, we are fortunate to have a dedicated Employment Tax team working alongside our payroll specialists. This enables clients to access the right advice from the right specialists.

As mandatory payrolling expands, employers will increasingly benefit from closer collaboration between payroll, finance, HR and employment tax professionals.

The practical reality

There is also a misconception that bringing benefits into payroll means every tax liability can simply be collected automatically; the reality is more complex.

The PAYE system includes rules designed to protect employees from receiving little or no net pay. There will be circumstances where the full tax liability cannot be recovered immediately, particularly where benefits are high in value or employee earnings fluctuate. HMRC's draft guidance acknowledges circumstances where the full tax due may not be collected within a pay period or even within a tax year.

This means employers will still need robust processes, accurate data and specialist support.

Payroll professionals will also face practical challenges around:

• Obtaining accurate benefit data on time
• Managing employee joiners and leavers
• Correcting in-year reporting errors
• Reconciling benefit information across multiple systems
• Explaining changes to employees

None of these challenges are insurmountable, but they do require planning and where using a payroll bureau service, understanding the how and when will be critical.

A growing profession adapting to change

Payroll professionals have consistently stepped forward to deliver major government initiatives, from auto-enrolment and furlough to National Minimum Wage increases and National Insurance reforms.

The challenge is not one of capability, but how change is managed across the wider employment landscape. While individual reforms are typically considered in isolation, employers experience their cumulative impact.

Alongside rising employment costs, increasingly complex pension administration, expanding reporting requirements and ongoing labour market pressures, employers are now being asked to fundamentally rethink how benefits are administered, reported and communicated to employees.

As payroll teams continue to successfully implement new requirements, it is important to recognise the planning, resource and expertise involved in delivering change effectively.

Plan early and seek advice

Mandatory payrolling is a positive development and one that should provide greater transparency for employees.

However, successful implementation will require more than payroll software.

It will require employers to understand where payroll administration ends and employment tax advice begins.

Those organisations that start planning early, review their benefit arrangements and seek the right support from payroll and employment tax specialists will be best placed to navigate the changes successfully.

Armstrong Watson’s payroll team and employment tax specialists have plans in place, and once the Government confirms the final position for the 2027 mandation, this will be communicated, allowing clients to plan early.