A major change to how employee benefits are taxed is fast approaching—and employers now have less than a year to prepare.
From 6 April 2027, it will become mandatory for most benefits-in-kind to be taxed through payroll, replacing the current system that allows reporting after the end of the tax year. The Chartered Institute of Taxation (CIOT) is warning businesses not to underestimate the scale of the shift.
Benefits-in-kind—such as company cars, private medical insurance and gym memberships—are a common feature of employee reward packages. Although provided by employers, they are treated as taxable income, meaning employees must pay Income Tax and, in some cases, National Insurance contributions (NICs) on their value. Employers also pay NICs on these benefits.
At present, the process is relatively delayed. Most employers calculate the value of benefits after the tax year ends and report them via P11D forms, giving them up to 15 months to finalise the figures.
That window is about to close.
Under the new rules, tax and NICs on most benefits will need to be calculated and processed in real time through payroll. This represents a significant operational shift—affecting payroll systems, internal processes and how benefits are communicated to employees.
The scale of the change is substantial. HMRC estimates that more than 3.5 million employees currently receive taxable benefits-in-kind, meaning millions of records and calculations will need to move onto a real-time footing.
The CIOT has emphasised that preparation will be key. Employers will need to review how benefits are valued, ensure payroll systems can handle the changes, and coordinate with software providers well in advance.
Sarah Hewson, Vice-Chair of the CIOT’s Employment Taxes Committee, described the move as having a “big impact” across employers, employees and software providers alike, warning that leaving preparations too late could create unnecessary disruption.
For businesses, the message is clear: while the deadline may still be months away, the transition will take time. Those that act early are likely to avoid last-minute complications as the new system comes into force.
