The formal payrolling of benefits allows employers to subject the taxable value of benefits in kind to tax via the payroll during the tax year. This can include benefits such as private medical insurance and company cars.
Registration is voluntary but must be made online before the start of the tax year in which the employer wants to start payrolling benefits. If the deadline is missed, employers cannot formally payroll benefits until the beginning of the following tax year.
All taxable benefits can potentially be payrolled, apart from employer provided living accommodation and low or interest free employer provided loans.
Communication with employees is important. Once registered employers must notify employees that their benefits are being payrolled and what it means for them. Once payrolling has started employers must provide employees with specific details about the benefits that have been payrolled by 1 June following each tax year.
The value of payrolled benefits is calculated in the same way as when reported on a P11D. This means that the Optional Remuneration Arrangement (‘OpRA’) rules must still be considered where payrolled benefits are provided under salary sacrifice or with the option of a cash alternative. The notional value of the annual benefit is then proportionately taxed via the payroll based on the number of pay days employees have during the tax year. For example, if an employer pays employees monthly, the taxable notional value of the benefit to be included in each pay period will be the annual value of the benefit divided by 12.
Employers who have formally registered to payroll must still calculate and pay the Class 1A NIC due on chargeable benefits provided and submit an annual form P11D(b). A Class 1A NIC liability generally arises whether the employer is payrolling the benefits and/or reporting benefits to HMRC on a form P11D. The P11D(b) must be submitted by 6 July, and the Class 1A NIC paid by 19 July (22 July if paying electronically), following the tax year.
Is payrolling benefits right for my organisation?
While payrolling benefits can be advantageous it is not right for everyone. Employers should therefore consider how payrolling benefits will affect them and their employees, and what both parties could gain from doing this. Before registering, employers should consider:
- what benefits they can and cannot payroll;
- the processes and procedures which will invariably be required to payroll benefits efficiently and correctly; and
- whether staff involved in the operation of the payroll will require training.
Three potential advantages of formal payrolling
- There is flexibility over what benefits and employees can be included.
- The requirement to complete annual forms P11D for formally payrolled benefits is removed, reducing end of tax year administration.
- Employees are more likely to pay the correct tax due on their benefits during the tax year. PAYE tax code errors and underpaid tax liabilities associated with benefits are less likely to occur if payrolling of benefits is done correctly.
Three potential disadvantages of formal payrolling
- Benefit values must be accurately determined and taxed in-year. Changes to benefit values must therefore be tracked, and taxable values amended in real time. HMRC penalties can apply where payrolled benefits are not payrolled correctly.
- Employers must (with some exceptions) wait until the end of the tax year to stop payrolling if it is not right for them.
- An annual P11D(b) is still due, mitigating the impact of reduced P11D administration.
How can RSM help?
At RSM our specialists have extensive experience of helping employers meeting their tax and NIC obligations in respect of employee benefits in kind. We offer a wide range of employee benefit related services to help employer’s optimise their compliance, mitigate risks, and save time. We can help you identify which benefits can be payrolled and whether this is the best option for your organisation. If you are already payrolling benefits we can review how you are doing this to identify problem areas, and help you optimise compliance and administration. Please see our flyer for further details.