If your company provides benefits in kind to employees, you will be familiar with the requirement to complete a form P11D at the end of the tax year for each individual. This form provides details of the monetary value of each benefit provided and the information must be included by the individual on their annual self-assessment tax return with the tax due being paid accordingly.
This P11D requirement has now been enhanced with a legal option to voluntarily payroll benefits. Under the new payrolling of benefits scheme, tax due on employee benefits is deducted via PAYE from the employee’s monthly salary. Although it has previously been possible to agree a similar scheme with HMRC on a case-by-case basis, this new official framework brings transparency to the process and will enable a greater number of companies to participate.
There are however pros and cons to automatic payrolling of benefits, and given that the scheme is currently still voluntary, companies should be aware of these and what is involved before deciding whether to register.
How automatic payrolling of benefits works
Firstly, a company needs to register with HMRC and specify the benefits they intend to payroll. Not all employee benefits can be payrolled and it may be necessary to continue using a P11D for some of them. The earliest time a company can begin using the scheme from is 6th April 2017 for the 2017/18 tax year.
The employer must calculate the annual cash equivalent of the benefit in the same way as when completing a P11D, but this will be on an estimated basis in advance of the benefit being paid, rather than at the end of the tax year as is the case with forms P11D. The cash equivalent then needs to be divided equally over the total number of pay runs for the year, so for a monthly paid employee, over 12 equal instalments. This calculation will need to be monitored on an ongoing basis, for example should the amount of the benefit alter during the year, to ensure the aggregate value entered into the payroll each pay cycle is correct at the end of each tax year.
In subsequent years, the benefits already specified can continue to be payrolled with no requirement to re-register. If a company wants to stop payrolling benefits, they must formally de-register. It is not possible, except in a limited number of specified circumstances, to leave the payrolling scheme mid-way during a tax year; doing so is likely to result in penalties being applied for an incorrect PAYE return.
Once your company is registered for automatic payrolling of benefits, employees need to be notified in writing to explain how the system works and what changes to expect. For example, it’s important to explain to employees that in the first year, exceptional situations may arise where an employee is paying tax on two years’ worth of benefits, if a previous year of underpayment is included in their tax code.
A number of payroll software providers have confirmed that their systems will support the new scheme by April 2017 and employers will of course need to ensure their software provider will have the required functionality.
Pros and Cons of automatic payrolling of benefits
No need to complete forms P11D;
Reduced risk of penalties for inaccurate or late submission of forms P11D;
Greater certainty for employees because paying benefit tax in real time each month means they are more likely to be paying the correct amount of tax and will not have unexpected tax liabilities for benefits in kind.
Risk of penalties for incorrect administration of the payrolling of benefits scheme;
Still need to complete a P11D(b) form for Class 1A NIC reporting;
The necessity for employees to monitor benefits to ensure the amounts taxed each month remain correct;
Employees will have to pay benefits taxes sooner than in the past, when it would have been paid annually through their self-assessment tax return;
Certain benefits can’t yet be payrolled, e.g. accommodation provided by an employer and low interest beneficial loans – these need to be included in a traditional P11D and submitted by 6th July;
Employees cannot be removed from automatic benefits payrolling mid-way through a tax year unless they 1) move to a new employer or 2) face an exceptional situation whereby their income drops below the value of the tax on their benefit (known as the 50% withholding rule). For example, if they are away for an extended period on maternity leave so their benefits continue but income reduces;
Payroll teams need to have information available to know when the cash equivalent of any benefit changes, e.g. renegotiation of a private health contract to a new provider with a different premium, and then adjust the payrolling system accordingly.
Recommendations for employers considering automatic payrolling of benefits
As automatic payrolling is currently voluntary, employers should consider whether it would be suitable for their organisation, based on the types of benefits offered and complexity of administering the scheme.
To work efficiently, payroll teams need to be closely aligned to their tax counterparts and ensure that updates or revisions to benefits are calculated in real-time. The cost and viability of this should be considered before applying for the scheme.
In the future it is likely that automatic benefits payrolling will be adopted as a standard as HMRC moves more towards tax simplification, digital tax accounts and real-time payment models. Getting an early start may therefore prove beneficial.
By Simon Paterson, partner at RJP LLP