Do your employees have taxable benefits in kind?

First published on 04 May 2022 by Alastair
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Most people who have been in business for some time are well aware that there are various benefits that employees have via their work. In the past, a car was a massive perk (less so nowadays), plus there are many others, such as private medical insurance, wellbeing initiatives, discounts arranged with suppliers, etc.

All these items normally go through your payroll. However, there are still some employers who don’t realise that the formal payrolling of benefits allows employers to subject the taxable value of benefits in kind to tax via the payroll during the tax year. This can include all the benefits mentioned above, and more.

The key thing here is that registration is voluntary, so that’s why some are unaware of it. That said, registration must be made online before the start of the tax year in which the employer wants to start payrolling benefits. If your miss the deadline, you cannot formally payroll benefits until the start of the next tax year.

Which benefits are covered?

Well, the good news is that potentially all taxable benefits can be payrolled. The major exception to which we would draw your attention is employer-provided living accommodation and low or interest free employer provided loans.

What do I need to do?

Firstly, get registered. You can begin this process here.

Secondly, you must tell your employees their benefits are being payrolled and what this means for them. Once you’ve begun payrolling, you must provide employees with the details about the benefits that have been payrolled, by 1st June following each tax year.

If you use the service, you will not need to use the P11D form, but you still need to work out the Class 1A National Insurance contributions on benefits and complete form P11D(b). The technicalities of this mean you calculate the value of payrolled benefits in the same way as when reported on a P11D. This means that the Optional Remuneration Arrangement (‘OpRA’) rules still have to be considered where payrolled benefits are provided under salary sacrifice or with the option of a cash alternative. The notional value of the annual benefit is then proportionately taxed via the payroll and based on the number of pay days employees have during the tax year. For example, if you pay your employees monthly, the taxable notional value of the benefit to be included in each pay period will be the annual value of the benefit divided by 12.

Be aware though that if you exclude employees from payrolling once you’re registered, you will need to send a P11D to declare the non-payrolled benefits. Once the tax year has begun, you’ll have to payroll the benefits for the whole of the tax year, or until you stop providing them.

Should I do this?

Although payrolling benefits can be advantageous this is not for everyone. Before registering, you should consider: what benefits you can and cannot payroll; what are the processes and procedures you’ll need to do to payroll benefits efficiently and correctly; and, if your staff involved in the operation of the payroll will require training.

That said, formal payrolling has three potential advantages. Firstly, there is flexibility over what benefits and employees can be included. Secondly, as noted above, the requirement to complete P11D forms is removed (this helps reduce end of tax year administration). Thirdly, and perhaps most importantly, your employees are more likely to pay the correct tax due on their benefits during the tax year because PAYE tax code errors and underpaid tax liabilities associated with benefits are less likely to happen.

On the other hand, there are also potential disadvantages. For a start, benefit values must be accurately determined, any changes tracked and everything taxed in-year. Be aware that HMRC penalties can apply if you get this wrong. With that in mind, if this is something you’d like to explore, we have considerable expertise in this area and would be happy to have a free initial, no-obligation chat to see if your firm could benefit.

Ashley Marshall, M&S Accountancy & Taxation

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