UK Payroll Compliance: Two 2027 Changes Employers Should Know 

If your business pays any employees in the UK, 2027 brings two changes you can't leave until the last minute. 

1. 1 January 2027: unfair dismissal protection starts after six months of service instead of two years, and compensation for unfair dismissal loses its statutory cap. 

2. 6 April 2027: HMRC requires employers to report certain benefits in kind through payroll, in real time, instead of on an annual form. 

Both are part of the Employment Rights Act 2025 and HMRC's payroll reforms, and the responsibility is on employers with staff in the UK. This guide covers each change in detail. 

UK payroll compliance in brief 

If a company employs someone who works in the UK, UK payroll rules generally apply to that person's pay. Rates and thresholds change, often each April. Check current figures with HMRC or your payroll partner. 

Change 1: Unfair dismissal rights expand on 1 January 2027 

Starting January 1, 2027, under the Employment Rights Act 2025: 

• The required employer period drops from two years to six months. An employee with six months of service can bring an unfair dismissal claim. Prior to this change, employees needed two years of employment. 

• The statutory cap on compensatory awards is removed. Employment tribunals will no longer face a limit when they award compensation for unfair dismissal.  

Why it’s important to employers 

In the UK, a dismissal generally needs a fair reason and a fair process. Until now, many employers have treated the first two years as a low-risk window. Starting on January 1, 2027, that window goes down to six months. 

• Hires you make in mid-2026 and after will cross the six-month line sooner. Check start dates now. Anyone who will have six months of service on or after January 1, 2027, needs to be on your radar.  

• Probation periods carry more weight. A probation review at month three or four is likely your key opportunity to document performance concerns. 

• Financial exposure is harder to size. With the cap gone, the worst-case cost of a lost claim is less predictable. That impacts budgets and decisions about who is the legal employer. 

Where payroll comes in 

Dismissal is an HR and legal process, but payroll will face the consequences. Teams often need to: 

• Calculate final pay, notice pay, and accrued holiday pay correctly. 

• Apply the proper tax treatment to termination payments.  

• Keep clean pay and employment records, which can become evidence. 

• Stop pension contributions and report those who leave to HMRC on time. 

Errors in any of these areas can turn an exit into a legal dispute. 

What to do before January 1 

1. List every UK employee and their start date. Flag anyone who reaches six months of service after January 1, 2027. 

2. Review your UK contracts, probation clauses, and disciplinary and capability procedures. 

3. Train managers on fair process for UK-based staff. 

4. Confirm who is the legal employer. With an EOR, the EOR typically holds employer obligations, but make sure to confirm how dismissal risk and costs are shared in your contract.  

5. Get legal advice before any UK termination. 

Change 2: Mandatory benefits reporting changes start April 2027 

HMRC announced reforms to the reporting of benefits in kind starts in April of 2027. A benefit in kind is something an employer provides on top of pay that carries a tax charge, like a company car, medical benefit, or fuel.  

Until now, most employers reported these after the end of the year on a P11D, a UK tax form. The changes require employers to calculate the tax value of the benefit and run it through payroll every pay period instead. 

The rollout is happening in phases: 

Between April 2027 and April 2028, many employers will run two processes at once: 

• Real-time payrolling for phase 1 benefits, through each pay run 

• P11D reporting for everything else, after the tax year ends 

Two processes mean two sets of data, two calculation methods, and two deadlines. Mistakes are easy to make: 

• A benefit gets reported through payroll and again on a P11D. 

• A benefit falls into neither process because the team assumed the other one covered it. 

• Employee tax codes don't reflect payrolled benefits, so tax is wrong during the year. 

• Benefit data sits with HR, fleet, benefits brokers and finance, and nobody owns the full picture. 

Why this impacts global employers 

A company with just a few employees in the UK often has no UK payroll team. Benefit data may be stored in a system or with a broker. Someone has to learn the rules, update the process, and still ensure that every payroll is run correctly.  

How managed payroll helps 

This is where an outsourced payroll partner is so valuable. A managed provider can: 

• Map which of your UK benefits fall in phase 1 and which stay on P11D 

• Calculate taxable values and apply them in each payroll run 

• Run payrolling and P11D reporting side by side during the transition year 

• Keep one set of records for a clear audit trail 

• Update the process again for the 2028 phase without you rebuilding it 

For cross-border payroll, IRIS handles pay and tax calculations, social security, year-end filings, and general ledger reporting. IRIS Software also supports US- and UK-based firms with legislative compliance and has more than 32,000 HR and payroll customers in the UK. 

What to do before April 2027 

1. List all benefits you provide to UK staff: cars, fuel, vans, medical cover and anything else. 

2. Sort each benefit into phase 1, phase 2 or voluntary. 

3. Decide who runs payrolling, and who runs P11D for the rest. 

4. Check that your payroll software or provider can calculate and report benefits in real time. 

5. Plan how you will tell employees. Their tax codes and take-home pay may change. 

6. Mark your calendar: April 2027 for phase 1, April 2028 for phase 2. 

Choosing a route when the rules are changing 

If you are deciding between an entity, managed payroll, and an EOR, these two changes may impact your decision. 

• With your own entity, you own dismissal risk and the benefits process. You need local expertise for both. 

• With managed payroll, the provider runs calculations, filings, and reporting. You stay the legal employer, so dismissal decisions remain yours.  

• With an EOR, the EOR is the legal employer and runs payroll. Confirm how the EOR handles dismissal processes and benefit reporting and deductions. 

IRIS delivers EOR through Globalization Partners, so a client can employ someone abroad without opening a local company.  

How IRIS can help 

IRIS Global HR & Payroll serves employers that pay someone in other countries. We provide managed payroll in 135 countries. If the 2027 changes make you want an expert on UK payroll, talk to us. 

FAQ 

When does the unfair dismissal change take effect?  

January 1, 2027. The qualifying period drops from two years to six months, and the statutory cap on compensatory awards is removed. 

When does mandatory benefits payrolling start?  

April 2027 for company cars, car fuel, vans, van fuel and employer-provided medical benefits. Most other benefits follow from April 2028. Loans and accommodation stay voluntary.  

What is a P11D?  

A UK tax form employers use to report benefits in kind after the tax year ends. 

Why will many employers run two processes?  

Between April 2027 and April 2028, phase 1 benefits go through payroll in real time, while everything else stays on P11D reporting. 

Do I need a local entity to pay employees in the UK?  

Not always. An EOR or a suitably set up managed payroll provider may be able to handle it.  

What is the difference between an EOR and international payroll?  

An EOR is the legal employer of record. International payroll processes pay workers that your business employs. 

Who is liable if payroll goes wrong?  

It depends on your contract and who is the legal employer. Get responsibility for errors, late payments, and penalties in writing.  

How does a company run payroll for its first UK employees?  

Choose a route (set up a local entity, managed payroll, or EOR), register for PAYE, set up pensions and RTI reporting, then run the first payroll.  

How much does global payroll cost per employee per month, and how long does setup take?  

Both vary by country, service model and headcount. Request a personalized quote and a timeline.