HMRC continues to update its guidance on the rollout of mandatory payrolling of benefits. The current position is that, from 6 April 2027, mandatory payrolling will be introduced in phases. Phase One will apply only to:
- company cars;
- car fuel;
- vans;
- van fuel; and
- medical benefits.
Mandatory payrolling for most other benefits will be introduced from April 2028. Although HMRC states that this phased delivery ‘will support employers and payroll providers to prepare and adapt in a manageable way’, it means that, effectively, two systems will be operating - payrolling for mandated benefits and P11Ds for other benefits. Hardly simplification!
It is clearly highly important that employers make employees aware of these changes, as they might affect tax codes and take-home pay.
Ideally, employers need to explain how employees who currently pay tax on benefits may not do so from April 2027. Many employees may not understand the current system fully and, from next year, they will pay tax on their benefits for cars, vans and fuel for both, and medical benefits in the year they receive them via the payroll.
Employees may currently have a deduction in their tax code for the estimated benefit, which will no longer be the case from April 2027. However, it is crucial that employees check their 2027/28 tax codes to ensure that affected benefits are removed. Moving forward, employees need to understand that they will be taxed on affected benefits in real time in the year they are received.
In addition, employees may also be paying back an underpayment of tax on a benefit provided in a previous year. Such adjustments may or may not be correct, but are not affected by these changes.
HMRC is encouraging employers to explain how employees will be paying tax in real time on the cars, vans, fuel for both and medical benefits they receive for 2027/28, while they may also be catching up with underpayments on benefits from the previous tax year once mandatory payrolling applies.
It is highly important that employees understand what is happening as an incorrect tax code could be extremely painful for 2027/28. However, employers are not under any obligation to explain the changes or review tax codes. Also, even if the employer recognises that a tax code is incorrect, they cannot change it. They can merely advise the employee to contact HMRC to get the tax code put right and to discuss options based on their circumstances if any overlapping taxation causes hardship.
HMRC recommends that employers:
- make a list of all the benefits that they offer and would ordinarily report to HMRC on a P11D;
- make sure their payroll software can handle real time reporting;
- plan out how they will manage situations where employees leave or join during the tax year or benefits that change in value;
- ensure that they have read all HMRC guidance; and
- understand the process for dealing with any underpayment or overpayment.
Employers still need to register for voluntary payrolling from November 2026 for all other benefits that have not been mandated to be payrolled from April 2027, including loans and accommodation.