Since the 16/17 tax year, the importance of the P11D has diminished somewhat. This is because the government introduced the payrolling of benefits in kind scheme, simplifying the way employers reported employee benefits.
This was a welcome change, as it removed the burden of completing P11Ds at the end of each tax year. From an employee perspective, it also meant that it ensured they paid the correct tax and were not subject to PAYE code adjustments.
Despite the simplification however, there are cases where the rules have not been applied correctly, leading to potential HMRC penalties. We’ve therefore constructed this handy guide to payrolling of benefits in kind.
What Benefits are included?
Fortunately, the majority of benefits can be payrolled, with only two exceptions. If you, as the employer, provide living accommodation or an interest free (or low interest) loan, then these still need to be reported on the traditional P11D form.
Now, just because you can payroll all other benefits, doesn’t mean you necessarily need to. The system allows employers to essentially choose how they want to report the benefits in kind. This can be done on an employee by employee basis. If the employer does decide to payroll an employee’s benefits in kind, then there is no need to prepare a P11D with this information as the benefit has already been declared. However, be aware that a P11D(b) is still required in order to pay Class 1A National Insurance.
When to Register?
If you do decide to payroll benefits in kind, you need to ensure you register your intention with HMRC. The deadline is the day before the new tax year (5th April), but we suggest registering well before this date, to ensure that HMRC can get all their ducks in a row. By doing so, you’ll ensure HMRC has enough time to adjust each employee’s PAYE code.
PAYE rules state that employers cannot deduct more than 50% of an employee’s pay in tax. This is to ensure that the employee has enough after tax to pay for living costs. This is of particular note when an employee’s pay reduces significantly. To ensure you comply with the 50% rule, you may need to consider removing the benefit from payroll. HMRC will allow you to do this in this instance.
How to calculate the benefit value
There is only one significant difference to how you report a benefit on a P11D. That is, instead of reporting on the full year value you need to report it on a proportionate value (i.e. divided by 12 if you pay your employees on a monthly basis).
Change of Benefits
If your employee, for instance, gets a higher value company car midway through the tax year, then this value change needs to be reported on the remaining payroll periods.
What to do for each employee
If you register an employee for payroll benefits in kind, you’ll need to undertake a few actions. Firstly, you need to communicate the change to your employee with a letter explaining how the whole process works. This will save a lot of time and confusion later on down the line!
You then need to include the cash equivalent of the benefits in kind in their pay as a taxable amount.
You should provide your employee with information including the name of all benefits in kind that have been payrolled. The employee will especially need this if they complete a Self-Assessment.
Ensure that you still complete a P11D for any benefits in kind that are not payrolled.
By payrolling benefits in kind, you can save a lot of time and provide your employees with a clearer understanding of the tax they’re paying. However, despite the system being clearly easier, there are still rules you need to follow to ensure compliance. Bear in mind that you’ll still need to submit a P11D(b) for Class 1A NICs, which will be based on the cash equivalent of the benefits in kind.