Companies in the UK have always relied on “benefits in kind” to lure talented people and retain employees over the years. However, while promising great benefits is easy, recording and accounting for them is challenging.
Aside from accounting challenges, payroll processes typically struggle to file and classify P11Ds, the government form needed to record and file benefit information with HMRC. In short, benefit management via the P11D consumes too much time for little return.
Payrolling benefits, introduced in 2016 by HMRC, gives companies the option to simplify benefits management by reducing the amount of paperwork they have to file.
So how does this work, and can UK companies fully ditch the P11D?
What Does Payrolling Benefits Entail?
HMRC has steadily electronified tax and revenue reporting over the previous decade, and benefits accounting is no exception. Payrolling benefits allows companies to include the cash equivalent of some taxable employee benefits in payroll calculations.
Instead of filing and maintaining P11Ds for each employee and overall benefits compensation, companies can account for payroll benefits every time they pay employees. HMRC will deduct applicable taxes when a company files its records through the PAYE system, significantly reducing the complexity surrounding the benefits accounting process.
Companies can submit a Full Payment Submission, or FPS, with information about pay periods and total compensation, instead of maintaining a mountain of P11Ds for each employee. The FPS also contains information about National Insurance contribution deductions.
This process simplifies workflows for employers and doesn’t impact employees beyond the timing of their tax payments. Note that payrolling benefits is not compulsory. You can continue to use the P11D process if you prefer.
Here’s how companies can set up payrolling benefits with HMRC.
1. Register With HMRC and Identify Reportable Benefits
The first step to payrolling benefits is to register with HMRC. Note that you must register before the start of the tax year you wish to begin payrolling benefits from.
You’ll also have to figure out which of your benefits are eligible for payrolling. For instance, private medical insurance and gym memberships are eligible. Living accommodation and beneficial loans are not.
2. Calculate and Add Cash Equivalent to Payroll
This step is the same as with the P11D process. Calculate how much cash your company’s benefits are worth and add them to your employees’ taxable pay for each pay period. Run this as a step in your regular payroll process.
3. Deduct Tax and NICs and Update Payslips
Once you’ve added cash benefits to payroll, deduct income tax and National Insurance Contributions through PAYE. Make sure you’re using the right tax codes, and double-check your cash adjustment calculations. File wrong information, and you’ll likely receive a fine.
Once filed through PAYE, make sure your employees’ payslips display the taxable benefits they’ve received, along with any tax deductions. Note that employees who are enrolled in payroll benefits will not receive a P11D. Make sure you educate them beforehand about this and let them know that their payslips will contain all relevant information usually found on the P11D.
4. Submit PAYE and P11D(b) Form
You must submit PAYE information to HMRC before or on every payday. While you won’t have to complete P11D forms for your employees, you will have to submit a P11D(b) form listing the total Class 1A NICs due on all benefits you’ve provided.
Some benefits raise NICs or Class 1A NIs and the P11D(b) form is used to report the total amount of those contributions. This money is due on all the taxable benefits during the tax year. Note that this form is different from the traditional P11D. You must submit the P11D(b) form before July 6, after the end of the tax year. Because of this, you must still keep a record of all employee benefits paid even if you’re payrolling benefits.
Is Payrolling Benefits Worth it?
While payrolling benefits offers huge time and cost savings to employers, it might not be suited to every employer. For starters, not every benefit is eligible for payrolling. For instance, housing accommodation is not eligible.
If the majority of your benefits are ineligible, sticking to the P11D makes more sense. Another hurdle is the prospect of double taxation. HMRC will tax benefits twice during the first year when you switch from P11D reporting to payrolling benefits.
Employees who received benefits in the previous year and reported them via the P11D will be taxed for those. Once payrolled, current-year benefits will be taxed in real-time, giving rise to double taxation. Note that this double taxation occurs only during the first year due to the clash in payment timing.
It’s best to weigh the inconvenience your employees will experience due to this switch before executing it. If the switch leads to a significant employee burden that might lead to attrition, you might be better served sticking to the P11D process.
Dropping the P11D
P11Ds are a relic of a manual age when paper records mattered. However, as electronic solutions have grown in sophistication, payrolling benefits will offer your company several cost-saving advantages. While your employees will bear a double-taxation burden in the first year of the switch, it’s important to educate them about it in advance so that they can mitigate this burden.
In the long run, payrolling benefits with the help of an electronic solution is a no-brainer, thanks to its agility and cost-effectiveness.