As businesses navigate the complex landscape of employee benefits and compensation, the concept of payrolling benefits in kind has emerged as a strategic and valuable approach.
Payrolling benefits in kind is an option to consider when looking to simplify the way that your team’s benefits and expenses are taxed, but what does it really mean?
We’ve asked Paul Hulme, Executive Director to explain more.
Over to Paul
Payrolling benefits in kind helps to streamline the administrative process for employers. By including benefits in the regular payroll process, companies can simplify their reporting and compliance obligations. Sounds simple enough right? But there are considerations to think about.
Below I’ve highlighted the ins and outs of payrolling benefits as well as outlining some pros and cons to help you decide if payrolling benefits in kind can help your business.
What Payrolling Benefits in Kind Means
HMRC implemented the payrolling benefits in kind in April 2016. It offers employers who have registered the ability to be able to tax certain benefits in kind in real time, via their payroll system, instead of using annual P11D forms.
It involves registered employers including the cash equivalent of certain non-monetary benefits, such as company cars or health insurance. This allows the tax on these benefits to be calculated and deducted as and when, via the payroll system.
It’s important to note that you must be registered with HMRC, notify them of their intent to payroll specific benefits, and accurately report the cash equivalent of the payrolled benefits.
To be able to start payrolling your benefits for 2024-25, you need to register by 5th April. As always, it’s better to do this sooner rather than later, to allow HMRC time to update your employees’ tax records and remove any taxable benefits from their tax code. After this has been completed, you will then receive a revised tax code from HMRC via form P9, so you’re ready for the new tax year.
Letting Your Employees Know
Once you’ve registered, you must let your employees know. It’s imperative that this is a written announcement instead of just a conversation. You should highlight what payrolling benefits is and what it means for them, including the following:
- Details of what benefits are now being payrolled.
- The cash equivalent for the benefits payrolled.
- The relevant amount payrolled for optional remuneration.
- Details of any benefits that are not eligible to be payrolled.
Key Factors to Consider
Ensuring accurate payrolling and taxation of benefits is crucial to avoid any potential tax recovery measures by HMRC.
There are some cases where you may not be able to include benefits in the payroll, for example temporary decreases in an employee’s pay, such as during long-term absence.
Additionally, the 50% regulatory limit in income tax persists when payrolling benefits, potentially limiting the taxable portion of benefits in kind.
In cases where the tax due on payrolled benefits cannot be fully collected in one period, the balance must carry forward to the next period. If this is unfeasible, removing the employee from the scheme may become necessary, requiring the benefit to be reintroduced through their tax code.
It’s essential to know that even when choosing to payroll benefits for employees, you’re still responsible for settling the Class 1A National Insurance Contributions (NICS) liability by the 19th/22nd July following the tax year remains as the employer.
Advantages of Payrolling Benefits
It’s always good to be aware of both the advantages and disadvantages when it comes to a tactical tax benefit for businesses.
The main advantage of payrolling benefits in kind is that it makes it easier for employees to check if they are paying the right amount of tax. If any changes are needed to be made, they can be adjusted quickly and in real-time, to ensure that the correct amount of tax is paid by the end of the tax year.
Payrolling benefits in kind can also eliminate the need for a P11D form in most cases, helping to reduce the amount of time spent on the administrative process, and who doesn’t love less paperwork?!
If your business also offers company car benefits, you can remove the need to submit a P46 form- even less paperwork!
Disadvantages of Payrolling benefits
Of course, there’s no pros without cons. A significant disadvantage is that the incorrect application of benefits could mean either an under or over-payment. This ultimately means that if there are any changes to the benefit amount, these must be monitored and applied accordingly. You are also still required to complete and submit a P11(d) form, despite whether benefits have been taxed via P11D forms or payrolling.
Another disadvantage is that payroll agents can’t register on behalf of employers. Therefore, it is your responsibility as a business owner to register and pick the relevant benefits. This can be time consuming however and requires some administrative work.
Looking for advice?
If you like the sound of payrolling benefits in kind for your business, but require some more guidance, we are here to help. To speak to one of our friendly experts, you can get in touch by emailing [email protected]
