Before the summer, the Government reported that the tax gap was around £59 billion – that represents the difference between the amount of tax that HMRC expected to collect and the amount it actually received during 2024/25.
To put that in perspective, that’s the equivalent of around £850 for every man, woman, and child in the UK; nearly the entire annual budget allocated to funding every state-funded school in England; or almost the country’s entire annual defence budget.
In short, it’s a lot of money!
HMRC has a five-year plan to close this tax gap with one of the key focuses being “process and policy changes”. We can see that plan in action with the rollout of Making Tax Digital (MTD), which began in April 2026. Identifying tax liabilities at an earlier stage helps taxpayers prepare for upcoming tax payments and puts them in a better position to settle those liabilities on time. Understanding upcoming tax liabilities earlier also gives more opportunity to consider alternatives that might cost less tax.
Another example of these policy changes relates to the way tax on employment benefits is to be collected from April 2027.
What’s the current system?
Currently, taxable benefits are reported retrospectively. Employers are required to report them annually on a P11D form, which is due for filing by 6 July following the end of the tax year.
HMRC then uses the information reported on the P11D to calculate the tax due, often by adjusting the employee’s tax code.
What’s changing and when?
From April 2027, most of the taxable benefits we regularly see will need to be reported monthly, in real time, through the payroll system. Specifically, benefits such as the use of company cars and company vans, as well as private healthcare insurance, must be reported through the payroll and reflected on employee payslips.
Will my employees end up paying more tax?
No. The introduction of payrolling benefits does not, in itself, increase the amount of tax an employee owes on a taxable benefit.
HMRC has already been adjusting tax codes to collect tax due on benefits for several years, so this change to payrolling benefits will largely replace that existing process.
Employees may see their tax code return to the standard 1257L, with the taxable value of the benefit then added to their taxable pay and taxed accordingly. Essentially, a reduction in tax allowances is being replaced by an increase in taxable pay.
One potential benefit of this change is greater transparency for employees. They will be able to see more clearly which benefits are being taxed each month, rather than the tax being collected through an adjustment to their tax code.
What about “double taxation”?
You may have heard rumours of “double taxation” when these new rules come into effect next year, but this does not mean that the same benefit will be taxed twice.
In some cases, HMRC may amend an employee’s tax code in 2027/28 to recover tax still due on a benefit from the previous year. The individual could therefore be paying tax relating to their 2026/27 benefit at the same time as tax on their 2027/28 benefit.
Although this may temporarily mean that tax is being collected in respect of two different tax years, the same benefit is not being taxed twice.
What additional information will my payroll provider require each month?
This depends on the type of taxable benefit the employer provides.
For company cars or vans, if your payroll provider has also prepared your P11Ds in the past, they should already hold much of the information required to include the benefit through payroll. However, any changes — for example, a change of vehicle — will need to be reported promptly.
For private healthcare insurance, payroll providers will require confirmation of the amount paid on behalf of employees. Generally, payments are made monthly and the healthcare provider will issue a statement showing how the premiums are allocated between employees. Again, any changes to the premiums or to the membership of the scheme should be reported promptly.
I’m a director of a company and have a company car but no other employees. Will the new rules still apply to me?
Yes. Taxable benefits will still need to be reported to HMRC via regular RTI submissions.
If you draw a monthly salary from the company, the annual car benefit value will be spread equally over the year and taxed through the payroll in the same way as it would be for other employees.
If, however, you don’t draw a salary, HMRC may not be able to recover any tax due from you personally through the payroll but it may still be able to recover the Class 1A National Insurance due on the benefit from the company on a more regular basis.
Final thoughts
Payrolling benefits is more than a payroll change. It will affect the way employers manage benefit information, meet their reporting obligations and explain the tax implications to employees. Employers that start preparing early will be better placed to manage these changes and give employees confidence that their benefits are being taxed correctly.
If you’d like further information regarding any of the changes outlined above or our payroll services in general, please get in touch.
