19 January 2024
Most employers will be familiar with the requirement to report taxable benefits-in-kind provided to their employees to HMRC. This is typically done by preparing forms P11D, which must be submitted to HMRC by 6 July following the tax year in which the benefit was provided. However, this can be a time-consuming compliance process and, where employees receive only a single benefit eg private medical cover, reporting benefits in this way can often appear inefficient. There is also an inherent time lag between a benefit being reported and the income tax on that benefit being collected by HMRC, which is generally achieved through an adjustment to an employee’s tax code.
As the P11D is filed after the tax year in which the benefit is provided, the code is changed in a later year, and the collection of tax via this code adjustment is inevitably out of sync with the provision of the benefit.
Payrolling benefits - basics
Recognising these issues, HMRC has for several years permitted employers to collect tax on benefits in real time through their payroll, and it was recently announced that this approach will become mandatory from April 2026. Currently, employers are required to enter into a formal agreement made before the start of the tax year, the principal advantages of doing so being that:
- year-end forms P11D are not required; and
- the timing of tax collection is better aligned to the provision of the benefit.
This can be a considerable administrative easement, as it is possible to collect the tax via payroll for all benefits, with only two exceptions:
- employer provided living accommodation; and
- interest free and low interest (beneficial) loans.
Once payrolling of benefits is agreed in advance, by the employer registering online with HMRC and setting out which benefits are to be included and for which employees, HMRC removes the relevant benefit from those employees’ tax codes for the following and subsequent tax years. The taxable value of the payrolled benefits is then added to employees’ pay and the tax due is collected in real time via the PAYE system.
Key points to consider
Importantly, employers must notify HMRC of any employees they do not wish to payroll benefits for; otherwise it will be assumed by HMRC that all employees in receipt of the specified benefit(s) included in the request will need an amendment to their tax codes.
Whilst no forms P11D are then required to be completed for relevant employees after the tax year end, employers must still submit a form P11D(b) to HMRC, which summarises the taxable benefits provided to employees during the year and reports the Class 1A National Insurance contributions payable by the employer.
Employers must also notify employees which benefits have been payrolled during the year, including the amount payrolled, and advise them that their tax codes will not be restricted for the benefits included in the payroll. This notification must be provided by 1 June following the relevant tax year. At present, the payrolling of benefits must be formally agreed with HMRC in advance of the tax year, with employers having until 5 April 2024 to register via HMRC’s online service the benefits they wish to payroll for the 2024/25 tax year.
With payrolling benefits set to become the default mandatory method for reporting taxable benefits from 2026/27, employers might consider getting a head start and registering during the coming weeks for 2024/25.
For more information, please get in touch with Richard Travis-Nash or your usual RSM contact.