Benefits in kind are popular elements of many people’s salary packages, and are often an important factor for some people when deciding whether to accept a job offer. Benefits in kind are any benefits given by an employer to their employees or directors, which are not part of their salary or wages. Not all benefits are taxable, however, those that are must be properly declared to HMRC.
When you provide benefits to your employees, things like company cars, private medical insurance, gym membership etc, then you can either make a submission at the end of the tax year to HMRC to inform them of the amounts of the benefits provided, or you can process these benefits through your payroll.
If you don’t process the benefits through your payroll, then you will need to provide your employees with a P11D at the end of the tax year. With this method, employees receiving these benefits pay some tax retrospectively, because tax based on a P11D isn’t paid in real-time, but based on the previous year.
A P11D form is a HMRC document used by an employer to annually report certain expenses and benefits paid or made available to directors and employees. It is designed to provide HMRC with details of specific taxable benefits in kind which cannot, or the employer has chosen not, to be included in the payroll and are subject to PAYE and NIC deduction during the course of a year.
There are various factors to consider when choosing whether to payroll your employees benefits or to fill out a P11D.
- Efficiency
- Admin
- Preference
Payrolling benefits can streamline your admin processes as you will no longer have to report them on a P11D. However certain benefits such as; living accommodation, interest free and low interest loans must be reported on a P11D regardless.
Some employees may prefer for you to payroll their benefits so that they are being deducted for tax over the course of the tax year rather than as a lump sum and having to fill out a self assessment tax return.
If you’re currently using a P11D to report all of your employees benefits and you wish to start payrolling these, then you will need to wait until the start of the next tax year. You can’t choose to change over between tax years.
Registering to payroll employee benefits
If you’re intending to payroll benefits and expenses, you must register them online with HMRC, and you must do this before the start of the tax year. Companies that use the payrolling benefits in kind system must declare which benefits they want to put through payroll for their employees, at the point of registration. This then means that HMRC can amend the tax codes for all the necessary employees, in order to charge the correct amount of tax.
If you use the online service for payrolling benefits and expenses, then you will not have to submit a form P11D for the employees. If you miss the registration deadline, you cannot payroll benefits until the following tax year.
Class 1A National Insurance Contributions
You must pay Class 1A NICs on the cash equivalent of the benefits you provide to your employees, regardless of whether you process these through your payroll or prepare and submit P11Ds at the end of the tax year. Class 1A NICs will be calculated at 13.8% for the 2024-2025 tax year.
If you choose to process your employee benefits through your payroll, you’ll still need to work out the Class 1A National Insurance contributions on the cash equivalent of the benefits and complete a P11D(b) for the employer. The Class 1A National Insurance contributions liability applies if you’re payrolling the benefits or reporting to HMRC on form P11D.
Key Dates:
- Inform HMRC before the start of the tax year if you want to payroll employee benefits
- Submit P11Ds and/or P11D(b)s by 6th July following the end of the tax year
- Pay any Class 1A NICs by 22nd July
Here’s an example
An employer wants to payroll the health insurance benefit to their employees
- They pay £600 per year, per employee for this. They tell their employees they’re going to payroll this benefit.
- They register with the online service before the start of the tax year and select medical benefit as the benefit they want to payroll.
- Their employees’ tax codes automatically change to take out the adjustment for this benefit — the employees are told by HMRC.
- During the tax year, the employer works out the taxable amount of the benefit and adds this to the employees’ actual monthly pay.
- The annual cost is divided by the number of paydays in the year, and the employees pay tax on this amount. This can be worked out as:
£600 ÷ 12 = £50 per month
Inform employees
If you choose to payroll your employees benefits you must let them know by 1st June after the end of the tax year. You can let them know via their payslip, letter or email. You’ll need to let them know the details of the benefits being payrolled, the value and cash equivalent. You will need to specify which of the benefits are subject to PAYE tax. You’ll also need to confirm the amount of benefits which have been payrolled and details of any benefits which have not been payrolled.
They will need to know what to expect in the first year;
- Their tax code will change for the adjustment
- That the adjusted amount will be put through payroll each month and that they will pay tax on that amount
- At the end of the year you will let them know how much taxable benefit they have received and what it was for
Making Good
Employers may agree that employees can make payments towards the cost of a benefit – this is called ‘making good’. When employees choose to do this the cash equivalent of the benefit is reduced or if the full amount of the benefit has been ‘made good’ there is no taxable benefit as the employee has paid for it in full.
Payroll can be a rather complex area when it comes to your business and it’s something that must be done right for compliance with HMRC. If you’re unsure about which approach is best, talk through your options with your payroll provider. If you don’t have a payroll provider then maybe we can help.
Book a call today to find out whether payrolling your employees benefits is suitable for you and your employees.