The tax code system is difficult for most employees to understand. Many do not check their codes and are paying the wrong amount of tax. Payrolling of benefits is a great chance to simplify this dramatically. Employers will have fewer P11Ds to complete and will spend less time answering employees’ questions about their tax!
How does it work?
In simple terms, payrolling of benefits, which is currently voluntary, is all about switching from employee tax code adjustments to real time and more accurate payroll tax.
In broad terms, it works as follow:
- The employer decides which benefits it wishes to payroll
Living accommodation and loans cannot be payrolled.
- The employer contacts HMRC
HMRC’s agreement must be in place before the start of the tax year. Ideally, the employer should notify HMRC by the end of the calendar year, before New Year tax codes are issued.
- HMRC will issue tax codes without the benefit that is being payrolled.
- Employers will payroll the chosen benefits from the following 6 April.
- Employees’ pay and payrolled benefits will be shown on their P60s.
- Employers will only need to complete P11Ds for benefits that have not been payrolled.
- Class 1A (employers’) National Insurance will still be due on the normal due date for payrolled benefits and any other benefits, via the usual P11D(b) process.
Common payrolled benefits
Some employers think this will take more time, not save time. That is an understandable concern, especially for the first year. It’s worth looking, however, at the two most common payrolled benefits.
1. Medical insurance
In the best case, with a renewal date of 6 April, the amount to be processed will not change throughout the tax year. In most cases, however, the cost of the benefit will alter during the year, which means employees pay tax on one amount for the first part of the year and a different amount for the rest of the year The change in taxable amount, though, should only happen once in the year.
2. Company cars
These may be more challenging, for example, where an employee makes a payment to the employer for private use. While there may be some scenarios where it is not so easy to payroll the benefit, in most cases, it should be quite straightforward as the employee will have the same car for the whole year.
Systems and procedures that track benefit changes are likely to be the key to successful payrolling for employers.
Why do it?
There are a number of great reasons to do it. The new system will simplify individuals’ tax affairs and employers, who are typically the first point of contact for an employee with a tax concern, will receive significantly fewer queries.
These benefits can be summarised as follows:
1. Time savings for employers:
a. Fewer or no P11Ds to prepare;
b. Fewer employee tax questions.
2. Simpler and correct tax deductions in real time for employees:
a. Minimal tax code changes;
b. Easier-to-understand tax, especially if all benefits are payrolled.
Employers have a great opportunity to communicate this change in a positive way.
They will need to explain the impact of payrolling changes to employees and make them aware that their tax codes will change when HMRC removes the payrolled benefit from the code.
In explaining to employees what is changing, employers could take the opportunity to refresh employees about how the PAYE system works, the make-up of their payslips and the interaction with their tax codes. This raises financial awareness, puts the employees in a far better position to identify any inaccuracies in their tax codes and to understand the implications and demonstrates a really proactive approach to engaging with them on tax matters.
In our experience, employees have really appreciated the financial awareness sessions we have delivered to them for their employers. Feedback is clear that implementation went better because of this exercise and employers are now saving time, as they have fewer P11Ds to complete and have fewer employee tax code questions.
Payrolling of benefits should be attractive to employers, whether it is for those with a wide range of benefits or for those with just a few benefits.
Remember, it is possible that payrolling will become compulsory in years to come. Employers have a real opportunity to get on the front foot now and enjoy the advantages as early as possible.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.