Tax Insight: Payrolling benefits in kind

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Now you can tax company benefits manually through PAYE – discover the advantages of taxing benefits in kind yourself including avoiding  hidden tax bills and overpaying.

Since April 2016, the government has allowed companies to voluntarily tax their employees’ benefits in kind.

So instead of HMRC assessing company benefits via employee PAYE tax codes, employers can directly account for income tax on the benefits in kind they provide to their employees through PAYE each payday.

What are benefits in kind?

From company cars to gym memberships and private  medical insurance, every entitlement you grant as an employer which isn’t shown as salary, is known as a ‘perk’, ‘fringe benefit’ or ‘benefit in kind’ and needs to be taxed.

How has the process changed?

Traditionally, HMRC would assess all benefits in kind via  employee tax codes and a completed P11D form.

Yet with the shift towards Real Time Information, companies are now encouraged to account for income tax manually each payday through payroll. This is called  ‘payrolling’.

To do this, the employer includes the cash equivalent of the benefit in the employee’s pay on a month-by-month or week-by-week basis.

The change has been implemented to ease admin duties and do away with the need to complete  unnecessary paperwork.

The benefits in kind that may be processed this  way are:
  • Company cars
  • Fuel benefit
  • Private medical insurance
  • Taxable subscriptions  
Since 2017/2018, the only benefits in kind that cannot be payrolled will be accommodation and beneficial loans. 

What are the main advantages?

Remember, that payrolling benefits in kind is not yet compulsory. It may become so once the tax  environment becomes fully digital, but for now it’s voluntary.

If you’re thinking about taxing benefits in kind manually, you may find it helpful to know about the various advantages it can deliver:
  • Your employees will be paying the right amount of tax during the year on their benefits in kind so there should be fewer changes to their PAYE tax codes.
  • You could save on admin costs, depending on whether the effort involved with determining the taxable values on benefits in kind on each payroll will be less than completing previous annual forms (P11D).
  • If you’re an employer that provides only a small range of benefits in kind, payrolling benefits in kind could work out well for you It’s worth bearing in mind that there are still rules to be followed about getting the correct taxable values included in each payroll run.
These rules also cover what to do when it’s not possible for the employee to pay the full amount of tax due on the benefit in kind during the year.

How do I sign up?  

Firstly, you’ll need to register with HMRC online.   

At the same time, you’ll need to specify and quantify the benefits as well as identify the  employees receiving them. HMRC will then automatically amend its PAYE tax codes.

There are several other matters you need to take care of. Check them off from this list:
  • Inform your employees of the change. There’s a handy draft letter on the HMRC website.
  • Confirm that your payroll software is compatible with payrolling benefits in kind. Most commercial software has been for 2017/2018 onwards.
  • Determine the annual value of the benefits in kind to be included in the payroll and calculate the amount to include in each payroll run.
And remember, registration can only be effective from the start of a tax year, so make sure you do this well before the 6 April to give HMRC time to adapt.

To find out more, please contact us.