In a large sauce pot over medium-high heat, add butter. Stir in the flour until pasty. Add milk; stir to remove lumps and let cook for 6 minutes until it gets thick. Lower heat and add the cheese, bouillon, nutmeg and black pepper. Whisk until well combined and sauce thickens, approximately 4 minutes. Remove from heat.
In a bowl, combine butter, panko and smoky paprika. Stir well.
Place potatoes into a casserole dish. Pour cheese over potatoes and sprinkle au gratin on top. Wrap with foil and bake in oven for 35 to 45 minutes. Remove foil and cook for 10 minutes uncovered. Allow to sit for 10 minutes.