In this article, Kevin Ferguson looks at how employers can now tax expenses and benefits through their payroll by adding the value of them to their taxable income (payrolling), rather than having to provide them separately.
Some employers were already applying this process by using their own informal arrangements but HMRC has now streamlined the process of Payrolling Benefits in Kind. But if employers are intending to or are already payrolling expenses and benefits in this way they must register this with HMRC and they must also ensure that their payroll software allows them to collect the right amount of tax on benefits and expenses or they won’t be able to do this.
Employers can only register for payrolling for full tax years and they must register to payroll expenses and benefits in the following tax year any time up to 5th April. From this point future years expenses and benefits will be carried forward and payrolled automatically.
Which benefits can an employer payroll?
Employers can payroll all benefits apart from:
• Vouchers and credit tokens
• Employer provided living accommodation
• Interest free and low interest (beneficial) loans
When an employer registers their Payrolling Benefits in Kind with HMRC, they must inform them about which benefits that they would like to payroll. The tax codes for all employees receiving these benefits will then be amended accordingly.
Once an employer registers to payroll benefits for their employees they must:
1. Provide employees with a letter explaining what payrolling is, how it works and what it means for them.
2. Include the benefit’s cash equivalent in their pay as a taxable amount.
3. Provide employees with the following information before 1 June following the end of the tax year:
• A description of the benefits that have been payrolled in the tax year, for example car fuel.
• The cash equivalent of each benefit that has been payrolled in the tax year.
• Still submit a P11D to HMRC for any benefits that you don’t payroll and provide the employee with the details.
4. If the employee completes a Self-Assessment Tax Return they need these details so they can report the total amount of PAYE income and the benefits they received on their Employment Page in the return, along with their pay. They must also report separately any benefit that wasn’t taxed under PAYE in their return.
The ‘cash equivalent’ must be included in the P60 at the year end as part of the ‘total taxable pay in year’ and included in any P45 in the ‘total taxable pay to date’ field.
Employees who promise to ‘make good’ a benefit
If an employer payrolls car and car fuel they mustn’t complete P46 Car Forms as they are deducting the tax due on these benefits at source.
However some employees may choose to make a payment towards the cost of a benefit and this is known as ‘making good’. When they choose to do this, it reduces the cash equivalent of the benefit. If the full cost of the benefit is made good, there is no taxable benefit as the employee has paid for it. These arrangements are often made for private use of car fuel where all the cost of the provision of the private fuel has to be made good to reduce the benefit.
We hope that this article has provided you with a useful introduction to Payrolling Benefits in Kind but there are undoubtedly many questions that employers will need answers to such as how do you?
Calculate how much to payroll each time you pay your employees.
Work out the cash equivalent.
Work out pay periods and the taxable amount of the benefit.
Calculate irregular pay periods.
Deduct or repay tax.
What do you do if an employee leaves their job.
If your employee leaves and you have already paid them.
If the value of the benefit changes.
If your employee’s tax exceeds 50% of their pay.
As you will see there are many factors that have to be taken into account but if you need help or advice on Payrolling Benefits in Kind please don’t hesitate to get in touch with me or one of the team at JRW.