Major changes to employment tax

From April this year, new measures aimed at simplifying tax compliance for employers will be introduced.

The end of dispensations

Currently, employers are required to report employees’ business expenses on P11Ds unless they have obtained a dispensation. From 6 April 2016 an exemption for business expenses will remove this requirement, making dispensations invalid. The exemption will not apply to expenses provided in conjunction with salary sacrifice schemes.

Employers will need to ensure that only tax deductible expenses are paid without being reported on P11Ds. This means employers should have sufficient processes and policies in place to capture any expenses not covered within the exemption.

The exemption will also apply to scale rate expenses paid in an approved way. Employers who already have an HMRC agreement to pay bespoke scale rate expenses must, before 6 April 2016, notify HMRC that they want this to continue or agree a new scale rate with HMRC. There is likely to be a rush of employers doing this in the lead up to the deadline, so early contact with HMRC is advised.

Academies are advised to begin preparing for this change before 6 April 2016.

RSM can support you through this change by reviewing your systems and policies to ensure that expenses paid are in line with HMRC’s views of what constitutes a business expense.

Formal payrolling of benefits for tax

From 6 April 2016 employers will have the option to formally tax benefits via the payroll. Employers doing this won’t need to report payrolled benefits on P11Ds and HMRC will remove these benefits from employees’ tax codes. Employers will still need to complete an annual P11D(b) to report and pay their Class 1A NICs.

Formal payrolling won’t apply to living accommodation, loans, vouchers, and credit cards. These benefits can be payrolled, but informally and without removing the P11D obligation.

Employers wishing to payroll benefits for 2016/17, including those already doing so informally, should have registered online with HMRC by 21 December 2015 to ensure 2016/17 tax codes, that have started to be issued are more likely to be correct. Employers who have not registered by 6 April 2016 won’t be able to payroll benefits formally for 2016/17.

What are the benefits?

One advantage of payrolling is the reduction in P11D administration. This makes payrolling feel compelling but, in reality, payrolling could increase in-year administration and make monthly payroll compliance more complex.

Salary sacrifice for travel and subsistence

As part of a huge change to the rules, and part of a wider HMRC review of the travel and subsistence rules, from 6 April 2016 employers paying tax and NICs free travel and subsistence payments to employees, funded by salary sacrifice, must operate PAYE on those payments.

Legislation abolishing NICs relief is expected before April 2016, removing the NICs saving employers operating these arrangements have enjoyed.

Affected employees will be able to claim a tax deduction for their actual travel and subsistence expenses personally and HMRC has said it will make this easier for employees.

Lower paid employees

Employers with lower paid employees receiving benefits should be aware that, from 6 April 2016, the £8,500 threshold is being removed making most benefits provided to such employees reportable, taxable, and liable to Class 1A NICs.

While some employees will be sheltered from additional tax by their personal allowance some, however, will not and will start to receive P11Ds for the first time. Employers won’t have the luxury of the personal allowance to shelter them from an increased Class 1A NICs charge.

This may impact some cleaning and other support staff within academies.

If you would like to discuss this in greater detail, please get in touch with Mike Cheetham.