There is an alternative to the dreaded annual form P11D. Find out the pros and cons of reporting benefits via payroll instead.
As the end of the tax year approaches, the task of completing another year’s worth of form P11D to report your employee benefits lurks imminently on the horizon. For many companies, the task of completing the P11Ds is tedious, time consuming and create a lot of questions from employees and is generally loathed by those who are tasked with it.
Despite the widespread dislike of the form P11D, a relatively low percentage of companies have adopted the alternative approach available. and report (and tax) benefits via PAYE.
For a number of years, HMRC has offered the ‘Voluntary Payrolling of Benefits’ which, once a company has signed up, removes the need to complete the annual P11Ds. The scheme means benefits are reported via a company’s payroll (rather than the P11D) and income tax is paid via PAYE.
Payrolling employee benefits has advantages for both employers and employees. For employers, there are no P11Ds to complete and for employees, the tax due on their benefits is paid evenly throughout the year, with no big surprises once the P11Ds are filed with HMRC. The tax due is calculated on the actual value of the benefits received rather than an estimated value included in an adjustment to the PAYE code.
No additional taxes should be payable (on their benefits) at the end of the tax year. This in turn reduces the need for HMRC to make adjustments to PAYE codes throughout the year, to account for unpaid taxes from an earlier tax year. In so doing, it makes an employee’s PAYE code much easier for them to understand. The value of simplicity should not be underestimated where tax is concerned.
However there are some downsides to payrolling benefits, and employers should consider these before signing up for this method of reporting benefits
Firstly, not all benefits can be payrolled. According to HMRC guidance, several benefits should not be payrolled these including accommodation (not paid by way of a cash allowance) and taxable beneficial loans. Many companies payroll accommodation on a voluntary but not HMRC approved basis (i.e. not official under the payrolling of benefits scheme) and though this may yield the correct tax withholding position, it does not remove the requirement to complete a P11D at the end of the tax year.
Secondly, Class 1A NICs, which arise on employee benefits and are paid only by employers, remain due and cannot currently be paid via the PAYE system. ‘Normal’ Class 1 NICs are not due even though amounts are reported via payroll. So despite there being no need to prepare file individual P11Ds for your employees at the end of the tax year, companies still need to prepare and file the form P11D(b) to calculate and pay their Class 1A NICs for the year.
Finally, making the change from P11D reporting to payrolling of your company benefits will involve some additional work for the HR and Finance teams. Not only must they set up the new arrangements and establish new processes, but they also need to deal with HMRC and communicate the change to employees.
Making a balanced judgement
In the long run, payrolling benefits should reduce the administrative burden of reporting employee benefits but many companies haven’t had the capacity to take on yet another tax project during Q1 of the calendar year, especially when it is voluntary, with the benefits not being realised for over a year.
Overall, we think the payroll route is an improvement on the current P11D reporting system. Although the scheme is still voluntary, it’s likely to become mandatory at some point (presumably when HMRC can iron out details like paying Class 1A via PAYE). Adopting the processes now may be better than having to do so in the future. but only you can make the assessment for your company.
Don’t leave it too late
If you would like to say goodbye to P11Ds and start payrolling your employee benefits for the 22/23 tax year, now is the time to act. You need to notify HMRC before the start of the tax year that you will switch to payroll reporting.
Registration can be completed via the link below by 5 April 2022, so that HMRC can make changes to your employees’ PAYE codes and remove existing coding adjustments relating to benefits. If you miss this deadline, you will not be able to begin payrolling benefits until the 23/24 tax year at the earliest.
Payrolling employees: taxable benefits and expenses – GOV.UK (www.gov.uk)
PAYE Settlement Agreements (PSAs)
It is also worth noting that companies can ease some of their P11D reporting burden by entering into a PSA with HMRC in respect of certain benefits.
A PSA allows a company to forego the P11D reporting of the taxable benefits covered by the agreement. Instead, the company pays both the income tax due on the benefit on behalf of the employee (so grossed up tax rates apply) and Class 1B NICs on the combined value of the benefit and grossed up tax.
Only benefits which are ‘minor, irregular or impracticable’ to report on a P11D can be included in a PSA. Examples of benefits regularly included taxable long service awards, employee gifts, staff entertaining (such as a Christmas Party costing more than £150 per head, team building drinks, irregular social events) and relocation in excess of the £8000 exemption.
Without a PSA, companies should report these benefits on P11Ds – with employees paying the tax on them in the normal way.
If your company does not yet have a PSA, or needs to amend an existing one to extend its coverage to a new benefit, application need to be submitted to HMRC by 6 July 2022 if you wish it to apply for the 2021/22 tax year. Once agreed by HMRC, a PSA will apply on the same terms for future tax years and until the company (or HMRC) either seeks a change to the PSA or withdraws from it.
So will the 2021/22 P11Ds be the last that your company prepares? Or will they remain an old friend who visits you annually for a while longer?
For more information or advice on the issues raised in this article, please contact Daniel Kelly.
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