Would you like to do away with P11Ds? Do you want to simplify employment taxes and benefits? You should consider payrolling benefits!
HM Revenue & Customs (HMRC) have introduced a system of voluntarily taxing some benefits in kind (BIK) through the payroll, which may remove the need to do P11Ds. This systems allows for tax to be paid in each pay period instead of being looked at once a year and, in most cases, resulting in underpayments of tax by employees.
Employers must register with HMRC for this voluntary process by April of the tax year in which they wish to start. It is preferable to do this before the end of the calendar year as HMRC prepare tax code changes for the new tax year from January each year. The registration process is online and simple to follow. All you need is your organisations PAYE online Gateway login details and the details of the types of BIK you offer.
Some benefits can’t be payrolled at this time such as living accommodation and loans. Details of which BIK may be payrolled and how to calculate the cash equivalent amounts to be reflected on payslips can be found on the HMRC website.
Payrolling benefits example
(extracted from HMRC website)
The employer pays £600 per year, per employee for medical insurance. Their employees’ tax codes automatically change to take out the adjustment for this benefit – the employees are told by HMRC.
During the tax year, the employer works out the taxable amount of the benefit and adds this to the employees’ actual monthly pay (as a non-cash income part of taxable pay.) The annual cost is divided by the number of paydays in the year, and the employees pay tax on this amount. This can be worked out as: £600 ÷ 12 = £50 per month
Therefore, the non-cash value per month will be £50 per month. When the annual fee is reviewed, the same calculation will be applied to the new figure to get the new monthly figure to apply from the fee change month. This means that for a portion of the tax year your employee will pay tax on the same monthly figure and then, if there is a change to the annual fee, the second portion of the tax year will be the new figure.
You must notify your employees before you start to payroll benefits and inform them of the following:
- They should receive a tax code change from HMRC
- The cash equivalent to be reflected on their payslip
- Figures previously shown on P11D will not be on P60
- If year to date figures are not reflected on payslips, employees should receive an annual statement of all their payrolled BIK, as they will need this to complete their self-assessment, if they do one
As an employer, you will only be required to produce P11Ds for the BIK that you are not payrolling. If you payroll all your BIK, then you will still be required to produce a P11Db at the end of the Tax Year to pay your Class 1a NIC. Some payroll software providers already have a report for you to draw down to make this process simpler, check with your provider. If your provider does not have this service in place yet, it may be useful to keep a pay period record of your payrolled benefits, so you have a complete record when you get to tax year end.
The most common payrolled benefits are medical insurance and company cars. Medical insurance we covered in the aforementioned example. Company cars are greatly simplified, as the car details are amended on your payroll software as and when they change, which updates all the cash equivalent figures for income tax purposes. This means employees tax due is up to date and employers are no longer required to issue P46(Car) for each change. There is no delay in the reporting to HMRC and awaiting a new tax code to reflect the car changes.
Although, at this time, payrolling benefits is voluntary, it is possible that HMRC will make it compulsory, so why not get on the front foot and enjoy the advantages now. Contact our Payroll Bureau team to find out more.