Benefits and Expenses Through Payroll | What Employers Must Know

Short answer: Payrolling benefits and expenses means taxing them through your payroll in real time, instead of reporting them on a P11D after the tax year ends. Most benefits can be payrolled — but employer-provided living accommodation and beneficial (interest-free or low-interest) loans cannot, and must still go on a P11D. And from 6 April 2027, payrolling becomes mandatory in phases, starting with company cars and medical benefits.

Key takeaways

• Payrolling adds the cash equivalent of a benefit to taxable pay each pay period, so Income Tax is collected through PAYE as the benefit is received.
• You do not need a P11D for a payrolled benefit — but you must still file a P11D(b) and pay Class 1A National Insurance by 6 July (payment by 22 July if paying electronically).
• Only two benefits cannot be payrolled: employer-provided living accommodation and beneficial loans.
• Voluntary registration for 2026/27 closed on 5 April 2026 — you cannot change your reporting method mid-year.
• Mandatory payrolling starts in phases: company cars, car fuel, vans, van fuel and medical benefits from 6 April 2027; most other benefits from 6 April 2028.

What Does Payrolling Benefits and Expenses Mean?

Payrolling is the alternative to the traditional P11D system. Instead of reporting a taxable benefit once a year after the tax year ends, the employer adds the benefit’s cash equivalent value to the employee’s taxable pay in each pay period and deducts Income Tax through Pay As You Earn (PAYE). The employee therefore pays the tax gradually, in real time, rather than facing a tax-code adjustment months later.

Payrolling has been a voluntary option since April 2016. It does not change how a benefit is valued — the same valuation rules apply as for a P11D. What changes is only when and how the tax is collected.

If you run a small team and payroll already feels like a lot, our payroll for micro entities service handles PAYE, RTI submissions and year-end filings for you.

How Does Payrolling Work in Practice?

For each pay period, the employer adds a slice of the benefit’s annual cash equivalent to the employee’s taxable pay — not to the cash they take home. Tax is then calculated on the combined amount and deducted through PAYE.

Worked example: an employee has a company car benefit worth £3,300 for the tax year and is paid monthly. Each month, £275 (£3,300 divided by 12) is added to their taxable pay. They do not receive £275 extra — they simply pay tax as if they had been paid that much more. By the end of the year, they have paid the tax due on the full £3,300 through payroll.

Because the benefit is taxed through payroll, HMRC removes it from the employee’s tax code, so the same benefit is never taxed twice. If a benefit’s value is not known at the start of the year, the employer uses a reasonable estimate and adjusts it later in the year when the exact value is known.

Which Benefits Can You Payroll?

Almost every taxable benefit can be payrolled, including:

• Company cars, car fuel, vans and van fuel
• Private medical insurance and health cash plans
• Gym memberships and non-cash vouchers
• Mobile phones for personal use
• Other taxable perks provided to employees

Which Benefits Can You NOT Payroll?

Only two benefits cannot be payrolled under the current voluntary system:

• Employer-provided living accommodation
• Interest-free and low-interest (beneficial) loans

These must still be reported on a P11D, even if you payroll other benefits for the same employee. They are excluded because their values are worked out retrospectively, which makes real-time taxation difficult.

Note the distinction: some perks are not on this list because they are exempt from tax altogether, not because they cannot be payrolled. Subsidised canteen meals available to all staff and work-related training, for example, are generally exempt benefits — there is no tax to collect on them in the first place, so there is nothing to payroll and nothing to report.

What About Expenses?

Taxable expenses — costs you reimburse where the employee gains a personal benefit — can be payrolled in the same way as benefits. But genuinely tax-free business expenses should never go through payroll as taxable pay:

• Business travel and accommodation on work trips, where the cost is wholly and exclusively for business
• Approved mileage allowance payments — 45p per mile for the first 10,000 business miles in a tax year, then 25p per mile
• Trivial benefits costing £50 or less, provided they are not cash or a cash voucher, are not a reward for performance, and are not contractual

These are reimbursed tax-free and do not need to be payrolled or reported. If you are unsure whether a cost is a taxable benefit or a tax-free expense, see our guide on how to claim expenses as a limited company.

How to Register for Payrolling (Voluntary System)

Under the voluntary system, you must register with HMRC before the tax year starts — registration for 2026/27 closed on 5 April 2026, and you cannot change your reporting method part-way through a tax year. If you miss the deadline, the benefits concerned must be reported on P11Ds for that year, and you can register for the following year instead.

When you register, you tell HMRC which benefits you want to payroll. You can also exclude individual employees from a payrolled benefit through the online service — but once excluded, that employee’s benefit must be reported on a P11D, and you cannot add them back for that benefit in the same year.

If you miss the deadline or are unsure which benefits to include, a payroll provider can handle registration, calculations and submissions for you — or see how outsourced payroll works if you are considering handing the whole process over.

What You Still Have to Do at Year End

Payrolling removes the P11D for the benefits you payroll — but it does not remove all year-end duties:

• P11D(b): you must still work out Class 1A National Insurance on all taxable benefits and file form P11D(b) by 6 July following the end of the tax year.
• Class 1A payment: pay the Class 1A National Insurance due by 22 July if paying electronically (19 July by post).
• Tell your employees in writing: by 1 June after the end of each tax year, you must give each employee written notification of the benefits you payrolled, their cash equivalent values, and any benefits you did not payroll — and confirm they will not be taxed twice. In the first year, explain that their tax code will change to remove the benefit adjustment.

What Changes for Employees?

Employees notice three main differences when benefits are payrolled:

Tax Collected in Real Time

Tax on the benefit is deducted from pay as the benefit is received, instead of through a tax-code change months after the year ends. This avoids unexpected tax bills.

Clearer Payslips

The payrolled benefit value appears in the employee’s taxable pay on their payslip, so they can see exactly what they are being taxed on each pay period.

Tax Code Changes

HMRC removes the payrolled benefit from the employee’s tax code. A tax code that previously included a benefit adjustment will look different — this is expected, and it means the benefit is no longer being taxed through the code.

Mandatory Payrolling: The Phased Rollout

Payrolling stops being optional. HMRC has confirmed a phased move to mandatory payrolling of benefits in kind and taxable expenses, reported in real time through the Full Payment Submission (FPS), covering both Income Tax and Class 1A National Insurance:

• Phase 1 — from 6 April 2027: company cars, car fuel, vans, van fuel and employer-provided medical benefits. No registration is needed for these — HMRC will automatically remove them from employees’ tax codes.
• Phase 2 — from 6 April 2028: most other benefits in kind are expected to follow, although HMRC has not yet confirmed the final list.
• Loans and accommodation: these stay outside the mandatory regime for now. Employers who want to voluntarily payroll them will be able to register through a new service going live in November 2026, with a registration deadline of 5 April 2027.

The phased approach replaces the original plan for a single April 2027 switch, after feedback from employers and payroll providers. If you have not payrolled before, 2026/27 is the time to review your benefits, check your payroll software supports payrolling, and agree the process with your provider — before Phase 1 makes it compulsory for your most common benefits. Our comparison of the best payroll software for small businesses covers what to look for.

Advantages of Payrolling Benefits and Expenses

Real-Time Tax Collection

Tax is deducted as the benefit is received, preventing large and unexpected tax-code adjustments later.

Fewer P11Ds

Removing P11Ds for payrolled benefits cuts a whole year-end form for every affected employee.

Transparency for Employees

Employees see the benefit value on their payslips and understand what they are paying tax on.

Smoother Year End

With tax already collected during the year, there is less reconciliation and fewer queries when the tax year closes.

Challenges Employers Should Plan For

Accurate Benefit Valuation

You must calculate the correct cash equivalent for each benefit, and estimate it where the final value is not yet known — then correct it in-year if it changes.

Employee Communication

Staff need to understand why their payslips and tax codes look different. The written notification by 1 June is a legal requirement, not just good practice — and first-year explanations matter most.

Payroll Software Readiness

Your software must support payrolling and, from April 2027, the new FPS reporting fields for mandatory benefits. Check this with your provider well before the deadline, not in April.

Should You Payroll Benefits and Expenses?

For most employers, yes — and from April 2027, for cars and medical benefits, you will have no choice. Payrolling suits employers who want tax collected evenly through the year, fewer year-end forms, and clearer payslips for staff. It is less attractive only if your benefits are hard to value in advance — which is precisely why loans and accommodation remain voluntary.

If you are a small or micro company, the decision is simpler: the admin saving is real, but only if your payroll process is reliable. See does a small business need a payroll if you are still deciding how to run payroll at all.

Frequently Asked Questions

Can I payroll all employee benefits?

Almost all — but not employer-provided living accommodation or beneficial (interest-free or low-interest) loans. Those must still be reported on a P11D.

Do I still need to submit a P11D if I payroll benefits?

No P11D is needed for the benefits you payroll. You must still file a P11D(b) for Class 1A National Insurance and pay it by 22 July (electronic payment) following the tax year.

What is the deadline to register for payrolling?

Under the voluntary system, register before the tax year starts — for 2026/27 the deadline was 5 April 2026. You cannot change your reporting method mid-year.

When does payrolling become mandatory?

In phases: company cars, car fuel, vans, van fuel and medical benefits from 6 April 2027, and most other benefits from 6 April 2028. Loans and accommodation remain outside the mandatory regime for now.

Will my employees be taxed twice if I payroll a benefit?

No. HMRC removes the payrolled benefit from the employee’s tax code, so it is taxed once — through payroll. Your written notification to employees by 1 June must confirm this.

Benefits and Expenses Through Payroll with MicroEntityAccounts

Need professional help to manage employee benefits and expenses through payroll? We have got you covered. At MicroEntityAccounts, we implement payrolling of benefits in real time, handle calculations, and ensure HMRC compliance for Class 1A National Insurance.

Call us on 0203 441 1258 or email info@microentityaccounts.co.uk to discuss your payroll needs.

Last reviewed: 25 October 2026

The content provided on Micro-Entity Accounts, including our blog and articles, is for general informational purposes only and does not constitute financial, accounting, or legal advice.