An organisation is considering whether to start payrolling benefits for the upcoming tax year. What are the key advantages and disadvantages of doing so and how do you go about it? Head of Payroll, Joanne Gibson explains further.
What is payrolling a benefit?
When an employee’s taxable benefit (such as private medical insurance or a company car) is payrolled, the taxable value of that benefit for the pay period is added to their taxable pay in the payroll. This means that the income tax due is deducted from their gross pay in real time and paid to HMRC.
You want to payroll the health insurance benefit for all employees. The company pays £750 per year for each employee. During the tax year, you work out the taxable amount of the benefit and add this to your employees’ actual monthly pay which works out as £750/12 = £62.50 per month.
Payrolling is an alternative to completing forms P11D for reporting employee benefits, which are usually filed annually following the end of the tax year.
Advantages of payrolling benefits
No P11Ds. From the payroll team’s point of view, the most obvious advantage to payrolling is the end of the annual completing and submitting P11Ds , with a few exceptions. You’ll still need to submit a P11D with details of benefits which HMRC doesn’t allow to be payrolled, namely, living accommodation provided to employees and cheap rate or interest-free loans of more than £10,000.
There are fewer unexpected tax bills. Your employees are likely to prefer payrolling to the P11D procedure. Tax is deducted from an employee’s pay in real time so it smooths the tax impact to the employee, particularly in the first year of providing the benefit when HMRC will not have included the benefit in the employee’s tax code. If an increased benefit is only apparent to HMRC when the P11D is submitted, it will demand the extra tax from the employee all at once. Also, if a benefit has reduced, the employee will probably have paid too much tax through their salary due to their tax code being too high if it isn’t payrolled.
Disadvantages of payrolling benefits
Multiple calculations. One drawback of payrolling is that each time a benefit changes the taxable amount must be worked out and the next payroll adjusted. In other words, it’s no longer possible to put off the calculations and do the job all at once for the P11D. HMRC penalties can apply where payrolled benefits are not payrolled correctly. The counter argument is that it’s more difficult to make the calculations all at once which increases the risk of getting it wrong.
It applies for the whole tax year. Once you decide to payroll benefits, you’ll normally need to wait until the end of the tax year to stop payrolling if you later decide payrolling is not right for you.
P11D(b) may be needed. When benefits are processed through the payroll, they are subject to tax but not NI. Therefore, if a benefit in kind is liable to Class 1A NI this still needs to be reported to HMRC by 6 July after the end of the tax year by completing a P11D(b) and then paid with your usual PAYE bill in July. On the plus side, the calculation of Class 1A NI is simplified because the benefit figures you need can be taken direct from your payroll records.
If you decide to payroll benefits, consider keeping a running total of the Class 1A NI that will be due on them so that this can be shown as an accrual in the accounts.
How to apply to payroll benefits
You’ll need to register with HMRC using the payrolling benefits service.
Once registered, the tax codes for all employees receiving these benefits will be amended to remove the taxable benefit so they don’t pay tax twice on it.
To payroll benefits in 2023/24, you’ll need to register by 5 April 2023. If you miss the deadline, you won’t normally be able to payroll benefits until the 2024/25 tax year.
Payrolling means you’ll no longer need to prepare P11D forms except where you provide living accommodation or low interest loans of more than £10,000. However, it does mean you must calculate changes to the taxable amount of a benefit as soon as it happens, and you’ll still need to complete a P11D(b) each year to pay over the Class 1A NI due on the benefit. You’ll need to register by 5 April 2023 to payroll benefits for 2023/24.
If you would like further advice and support with your payroll do get in touch with JRW Payroll Team.