Payrolling benefits to become mandatory?

What is payrolling?

Payrolling of benefits in kind means reporting the value of a benefit in kind, such as a company car, through the payroll each pay period during the tax year rather than post-year end on Form P11D . This means that the employee pays the tax on the benefit in kind alongside the tax on their cash wages and so does not see any retrospective amendment to their tax code to pay the tax in a later tax year.

Authorised employer

Despite HMRC’s change of tone in the April Employer Bulletin (see Follow up ), payrolling is still voluntary and the mandatory benefit in kind reporting mechanism is via Forms P11D . It’s necessary to register for payrolling, normally before the start of a tax year, in order for HMRC to formally disapply you from the need to complete Forms P11D and allow you to supply the data during the year instead.

DIY. Registration cannot be undertaken by an authorised agent such as your payroll provider, but you must still have a discussion with your payroll provider and any agent who currently produces your P11Ds before you register. Although you will save fees on P11D production you will almost certainly have to pay higher payroll charges if you want your benefits payrolled.

Pro advice. Bear in mind that if you move to payrolling you will need to supply your payroll agent with changes in benefit information, such as increases in health insurance premiums, as part of your data for each payroll run.

Sections and people

As part of the registration process, you can select just specific sections of the P11D to be taxed through the payroll, allowing other sections to remain reportable. For example, you might choose to payroll medical insurance but not company cars. An employee who has both benefits in kind will see that their company car is still taxed by an adjustment to their tax code after the P11D has been submitted in July, whereas the medical insurance will be taxed each month through the payroll. When you select a section to be payrolled you have to payroll all the benefits in kind that would be reported in that section. For example, it would not be possible to payroll medical insurance but continue to report dental insurance on the P11D . At present, loans and living accommodation cannot be payrolled but it is expected that legislation will be amended shortly so that all benefits in kind can be payrolled .

Exclude staff. You can exclude certain employees from payrolling. For example, you might choose to payroll benefits for most staff, but not for the directors, preferring to complete a P11D for them. Once HMRC has received the registration it will remove the chosen benefits from the employees’ tax codes and reissue them to you.

Pro advice. Because registration leads to amended tax codes it makes sense to register pre-Christmas ready for the start of the next tax year as then HMRC will be able to remove the benefit in kind ahead of the annual coding run for the new tax year that normally takes place in January.

New benefit

What if you want to introduce a new benefit in kind in the middle of a tax year - do you have to wait until the following tax year before you can begin to payroll it? Strictly speaking the answer is “yes” but as HMRC wants to encourage employers to move to payrolling it will almost certainly agree that you can begin to payroll immediately on the introduction of a new benefit mid-tax year. Unfortunately, it will have to insist on you producing nil P11Ds for this first year of introduction of the benefit as you are not an authorised employer who can be excused from submitting P11Ds . On this first, and only, set of P11Ds each one must be marked “Payrolled” with the cash equivalent value for the benefit reported but then brought back to zero by completing the “amount made good” column by the value that has already been reported through the payroll.

Practicalities

When you decide to start payrolling a benefit you are reversing the process that you will have been used to with P11D submission. Instead of reporting the cash equivalent value of a benefit in kind that is factually correct, you are estimating the cash equivalent value at the start of the tax year and then making any corrections during the year as things change. A final “trueing up” is made in the last pay period of the tax year if necessary so that the final correct cash equivalent value has been reported as part of the last FPS.

Example

Let’s consider what might happen with medical insurance during a typical tax year. At the start of the tax year the annual medical insurance premium for a monthly paid employee is £600 and their salary is £24,000. For this value to be taxed it is divided by the employee’s pay frequency and that amount is added as a notional value to taxable pay. A notional value means that the taxable pay is increased but the employer does not receive the money. The employee receives a salary of £2,000 per month but is taxed on £2,050 per month as the medical insurance of £600/12 = £50. In October the premium increases to £650 per year but as there are only six months of the tax year remaining the additional £25 per year is divided by six and the notional value is increased to £54.17 for the remainder of the tax year as the cash equivalent value for the tax year is £50 x 6 = £300 and £54.17 x 6 = £325.02. But let’s say the payroll team were not informed of the increase in the medical insurance premium in October. They would then need to ensure that by March the correct taxable pay value for the year had been reported, even if that correction was made in the final month of the year.

Reporting and Universal Credit

The value of the payrolled benefit is reported on the FPS in field 60, allowing the Department for Work and Pensions to reduce the taxable pay value so that any employee who is having their benefits in kind payrolled does not have any Universal Credit (UC) award impacted, i.e. only their cash wages are considered in calculating their UC as would be the case if a P11D had been submitted for them.

Pro advice. It makes sense to report the value of any payrolled benefits as a separate piece of information on the employee’s payslip as this then avoids the employer having to send the employee an end of year statement with this information that would negate the benefit of not having to do P11Ds .

Pro advice. Ensure that all existing and new employees are aware of which benefits are payrolled and which are reported on a P11D as any benefits that are payrolled should not be reported again on the employee’s tax return.

Don’t forget the Class 1A!

When payrolling a benefit you are only dealing with the employee’s tax, you are not reporting and paying over the employers’ Class 1A NI liability. This must still be reported on Form P11D(b) and submitted by 6 July with the ensuing payment of the Class 1A liability being made by the 22 July. It follows that the P11D(b) will be a combination of the Class 1A from any remaining P11Ds , plus the Class 1A on any benefits that have been payrolled.

Pro advice. It makes sense to create a monthly payroll report of the Class 1A liability on any payrolled benefits so that your finance team are aware how much to accrue for.

Employer Bulletin