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Payrolling Benefits and Expenses

Who does this affect?
Payrolling benefits and expenses are likely to affect employees, employers, payroll providers and payroll software providers. Payroll software providers need to ensure their software is up to date and payroll providers are able to action this from 16/17 tax year starting on 06th April 2016. Employers will have to make the choice if they are to start payrolling benefits and expenses before the start of the tax year 16/17 and will need to register online to do this before the new tax year starts.

Payrolling benefits in kind provide the employer with the opportunity to reduce or remove the obligations to send returns to HMRC. It can also make the process of taxing benefits in kind (BIK) easier for employees to understand and is a more efficient way of collecting the correct amount of tax in real time.

Background and Current Situation
Under current legislation of reporting BIK, taxable benefits are reported on a form P11D. In conjunction with the P11D a separate form P11Db is also used to report the Class 1A National Insurance due on the BIK. Both forms are required to be submitted to HMRC by 31st July following the close of the tax year.  The employee then receives an adjustment to their tax code to collect the income tax due on the benefits in kind during the tax year.

By voluntary payrolling benefits in kind this will include the value of the benefit in kind in the employee’s taxable pay, as if they were cash payments and to deduct the tax due in each pay period through the payroll, meaning no P11D forms will need to be submitted. On the down side to this, payrolling the benefit in kind does not report the Class 1A NIC’s due therefore does not eliminate the manual reporting requirement as the form P11Db will still need to be submitted to report Class 1A NIC’s. For this reason we would recommend not payrolling benefits in kind and continuing to use the normal reporting methods of the P11D and P11Db until HMRC have developed the statutory framework to allow the reporting of NIC’s though the payroll as well as tax which only then payrolling benefits in kind will become more beneficial as this will completely remove manual reporting by forms.

Which Benefits Can Be Included?
The following benefits can be included in payrolling due to their high degree of certainty about their cost at the start of the tax year which make them easy for payrolling:

  • Car
  • Car Fuel
  • Medical Insurance
  • Subscriptions (Gym Membership)

All payrolled benefits and expenses need to be included when you report your payroll information in a Full Payment Submission.

The following benefits which you will not be able to report through payrolling include:

  • Vouchers
  • Credit Cards
  • Living Accommodation
  • Interest Free and Low Interest (Beneficial) Loans

Registering for Payrolling Benefits In Kind
If you already payroll benefits and expenses or intend to start this you must register them with HMRC using the online Payrolling Benefits In Kind (PBIK) service.

Before you can use this service you must ensure your payroll software allows you to calculate and deduct the correct amount of tax on all benefits and expenses. You will need to align your payroll software and register using the online service by 05th April 2016 to start payrolling benefits. After this date you will not be able to register to payroll benefits until the following tax year as currently HMRC are unable to process in-year changes.

By using the online service this allows you to:

  • Choose the benefits and expenses that you want to include in payrolling for the following tax year
  • Exclude those employees who receive benefits or expenses but do not wish for them to be payrolled (once excluded you cannot reverse the decision until the following tax year)
  • Add or remove any benefits or expenses to be payrolled.

After registration HMRC will automatically:

  • Identify those employees that have the chosen benefits or expenses in their tax code
  • Remove the benefit or expenses and issue a revised tax code

If you are an employer who uses HMRC Basic PAYE Tools you will not be able to use this service until the tax year 2017-2018.

How to Payroll Benefits and Expenses

Step 1 – Calculate the cash equivalent of the benefit (as you would when preparing P11Ds.)

Step 2 – Work out number of payments to be made to employee in tax year.

Step 3 – Divide the cash equivalent of the benefit by total number of payments due to be made.

Step 4 – The resulting amount of step 3 is the taxable value of the benefit which should be added to the employees wage in each pay period as a notional value.

Step 5 – Deduct tax as normal using employee’s tax code.

Problems HMRC are facing
HMRC have acknowledged that due to the scheme being voluntary one of the main issues which has been identified would be adjusting employees’ tax codes in advance of the employer opting out of payrolling benefits. Some employers may also decide only to payroll some of the BIK proposed for payrolling therefore employee information will be sent to HMRC electronically in real time and then in July following the tax year. Also still having to report Class 1A NIC’s on the P11Db means only half of the job can be completed in real time.

For further information please contact Jade or Stacey on 01733 865265.

Blog co-written by Stacey Hicks.