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How to tax your employees' benefits and expenses through your payroll
13 October 15 | By: Jas Jhooty
Following on from our recent article on how employers will be able to payroll benefits, we are pleased to inform you that employers can now register to use the new Payrolling Benefits in Kind online service if they want to start or continue payrolling in the 2016/17 tax year.
PAYE legislation is changing. Employers intending to or who already payroll benefits and expenses must register with HMRC using the new online Payrolling Benefits in Kind (PBIK) service. To use the service you’ll need your Government Gateway ID.
If employers use this service and payroll benefits and expenses they won’t have to report them on a P11D.
Benefits that cannot be payrolledThe only benefits employers cannot payroll using this service are:-
- vouchers and credit cards
- living accommodation
- interest free and low interest (beneficial) loans
If you’re already payrolling these benefits you can continue to do so but you must still report them on a P11D.
You’ll need to align your payroll software and register to payroll using the new service by 5 April 2016. You won’t be able to register after this date for the 2016 to 2017 tax year as HMRC can’t process changes in-year. To avoid being sent multiple tax codes for your employees you need to register before the annual coding process which usually starts around 21 December.
If you don’t register the benefits and expenses you’ll have to report them on a P11D. From the 2016 to 2017 tax year HMRC will no longer accept informal reports of employee benefits, sometimes referred to as lists.
All payrolled benefits and expenses need to be included when you report your payroll information in a Full Payment Submission.
P11D (b) forms must still be completed, including the total benefits and expenses provided, whether or not they’ve been put through your payroll. However, if you payroll car and car fuel benefit you mustn’t complete P46 (Car) forms as you’re deducting the tax due on these benefits at source.
Using the online serviceYou can:-
- choose which benefits and expenses you want to include in the payroll for the following tax year
- add or remove benefits and expenses
- exclude employees who receive benefits or expenses but don’t want them payrolled – for these employees you must continue to report the benefit or expense on a P11D
Section M on the P11D is used to report other items. For payrolling this needs to be treated with an all or nothing approach – you must either payroll all items that usually fall within Section M or none. Income Tax paid but not deducted from a director’s remuneration needs to be selected and payrolled as a stand-alone benefit within the PBIK service.When you register HMRC will automatically:-
- identify which of your employees have the selected benefits or expenses in their tax code
- remove the selected benefit or expense and issue an amended tax code
You only need to register to payroll each benefit once – unless you remove the benefit your registration will be carried forward every year. Once the tax year has started you must continue to payroll the benefit or expense you’ve registered for the whole tax year or for as long as you provide it.
How to payroll benefits and expenses
You collect the tax due on benefits and expenses by adding a notional value to your payroll, rather than reporting them separately on a P11D.
Before making the first main relevant payment to an employee in a tax year you need to calculate the cash equivalent of the benefit. You then need to determine the number of payments to be made to the specified employee in the tax year (weekly, fortnightly, monthly etc.) and divide the cash equivalent by the total number of payments to be made. The resulting amount is the taxable value of benefit which should be added to the payroll each pay cycle as a notional value. Then deduct or repay tax as usual by reference to the employee’s code, even if this is the subject of an objection or appeal.
Further technical guidance will follow after publication of the PAYE regulations.
End of Informal Payrolling process
If you have an agreement with HMRC, the existing informal payrolling process will stop on 5 April 2016.Up to this date you must:-
- complete the ‘amount made good or from which tax deducted’ fields where this applies
- complete a P11D (b) including the total benefits and expenses provided, even though they’ve been put through your payroll
How you submit P11Ds depends on which payments you’ve put through your payroll. If all the benefits and expenses paid to all your employees have gone through your payroll and you submit electronic P11Ds you need to agree with HMRC in advance that you’ll be sending P11Ds for directors or employees using this online form.If all the agreed benefits and expenses paid to some or all of your employees have gone through your payroll and you submit paper P11Ds you need to:-
- submit P11D information where the benefits you’ve put through your payroll have a corresponding entry for ‘amount made good or from which tax deducted’
- mark your paper submission (individual P11Ds or a list) ‘PAYROLLED’
How emTax can help
Employers need to be starting to prepare now on how they intend to develop workflows that will allow the reporting and processing of benefits information in a real-time environment. Our consultants are well versed in the practical problems surrounding obtaining accurate benefits information and can advise you of best practice solutions to develop such workflows.
If you are interested in this or any other employment tax service please do not hesitate to contact us.