Employer-funded healthcare trusts: tax reforms from April 2027

From 6 April 2027, it is expected to become mandatory for benefit in kind (“BIK”) tax on employer-funded medical benefits to be reported and paid in real time. This means that most employers who provide those benefits for staff will no longer be able to report them after the end of the tax year in which the benefit was received via the P11D. Legislation and finalised HMRC guidance on the details is expected to be issued following the 2026 Budget.

The reform constitutes a significant change to how medical treatment expenses funded via a trust are taxed. Employers should prepare for the change now, and explain its effect to their employees so that they are prepared, too.

The change will affect employers who operate their own bespoke trusts or participate in commercial master trust products. It may also impact employers who make use of commercial corporate excess and corporate deductible funding models.

In this Keynote, Pensions & Incentives partner Kevin Gude explains the reforms and notes actions that employers can take to ensure that they and their employees are ready, while preserving the administrative efficiency of the healthcare trust and the value of the benefits that it delivers.

How are medical expenses from healthcare trusts usually taxed?

Employer-funded healthcare trusts are an alternative means of providing medical treatment benefits to staff in a tax-efficient way. HMRC takes a pragmatic approach to the taxation of those benefits. Provided the trust is administered in accordance with certain non-statutory conditions, BIK tax is calculated by reference to the total contribution paid each year by the employer, split equally amongst participating employees, instead of each employee being taxed on the (often much higher) value of the specific medical treatment they receive.

This means that qualifying healthcare trusts are, in principle, taxed in the same way as traditional group medical insurance – with one key difference. Insured cover relies on the payment of a premium which is usually fixed at the start of the year. Healthcare trusts rely instead on the employer contributing to the fund during the year to meet benefit costs as they arise (supplemented in many cases by additional “stop loss” insurance). Although those contributions will be based upon a best estimate of predicted claims and admin costs, they can still fluctuate over the year in response to the number and cost of claims actually received. Where costs incurred exceed the prediction, this can affect the BIK rate, too (as the overall value of the benefit received by employees has increased). However, until now, it has been customary for the employer’s total costs to be assessed at the end of each year and employees’ BIK rates adjusted for the coming year so as to reflect the trust’s prior claims experience and future funding requirements, rather than for mid-year BIK adjustments to be made.

The practice helps to keep trust and payroll administration simple while ensuring that HMRC’s BIK receipts reflect the contributions paid by the employer year on year.

This will change from April 2027, and employers need to prepare for that.

What is changing?

From 6 April 2027, employers will be required to calculate Income Tax and Class 1A National Insurance contributions due in real time and report BIK through Real Time Information (“RTI”) using payroll software. By moving away from end-of-year reporting, HMRC says it expects tax to be calculated and collected more accurately and in a timely manner, reducing reliance on retrospective adjustments and complex processes and improving clarity for taxpayers.

The main practical effect of the reform on healthcare trust administration will be a need for ongoing assessment of employer contributions and the adjustment of employee BIK charges in real time. This is unlikely to be a practical concern where the funding estimate set at the start of the year is able to be adhered to throughout the year, as the associated BIK rate will also be maintained. But if claims and costs exceed the estimate and additional contributions need to be paid in, the taxable value of that addition will need to be recognised, reported through RTI as employment income, and then settled through HMRC’s pay as you earn (“PAYE”) system.

Preparations to make now

The new mandatory reporting regime will require employers to consider several practical matters, including information flows, payroll cut-off dates, and software compatibility.

For employees who participate in their employer’s healthcare trust, their employer’s contribution obligations could, for the first time, have a real-time effect upon the BIK tax that they pay. HMRC’s interim guidance from 2025 has already highlighted the importance of early communication with employees about the changes, particularly for employees who will start paying tax on benefits in real time in 2027-28 but also have a reduced tax code for that tax year to collect historic tax on benefits. This dual adjustment could result in reduced take-home pay for affected employees during the 2027-28 tax year.

Helpfully, HMRC has committed not to charge penalties for errors in the 2027-28 RTI returns if the errors relate to mandatory payrolling and there is no evidence of deliberate non-compliance. This penalty easement provides some protection for employers during the initial implementation year, recognising the complexity of transitioning to the new system. However, late filing and late payment penalties may apply if RTI returns are not sent on time or payment is not made on time, as will statutory late payment interest.

Key actions

Employers (with assistance from their employee benefit consultant and legal advisers) should begin considering how the BIK reform will affect how their healthcare trust is administered and funded.  The potential effect of the change where employers make use of stop loss insurance but are exposed to excess payments, or use a corporate deductible or corporate excess arrangement alongside their trust, should also be considered.

Attention must be given to if and how the changes will be explained to employees prior to next April (or, if earlier, the trust’s annual renewal, when the new year’s contribution rates are estimated). Finalised guidance on the reforms is due to be published around the time of the Autumn 2026 Budget.

If you are an employer or an intermediary and have questions or concerns about funding and providing medical benefits to employees, please contact Kevin Gude.