Detailed guide: Payrolling: tax employees’ benefits and expenses through your payroll

Updated: The employee pays towards the cost of benefit section has been updated to remove the tax deadline date.

Registration for payrolling benefits and expenses

If you’re intending to payroll any benefits and expenses, you must register them with HM Revenue and Customs (HMRC) using the payrolling employees taxable benefits and expenses service. You must do this before the start of the tax year.

Using the online service for payrolling benefits and expenses means that you won’t have to submit a form P11D. You must tell HMRC which benefits you want to payroll during the registration process.
The tax codes for all employees receiving these benefits will be amended, unless you exclude any employees that you don’t want to payroll benefits for in the online service.

If you miss the registration deadline, you can’t payroll benefits until the following tax year. However, if you have a valid reason, HMRC may agree that you can informally payroll, but you must still complete form P11D at the end of the tax year. Mark each P11D ‘Payrolled’. This stops HMRC collecting tax that has already been deducted from your employees.

Deregistration from the online service

Your registration is continuous so you only need to tell HMRC if you decide to deregister. You can do this before the start of the tax year using the online service.

If the tax year has started when you change your mind, you must wait until the end of the tax year before you stop payrolling. You’ll still need to deduct tax each payday and report this deduction to HMRC.

Benefits you can payroll

You can payroll all benefits except:

  • employer provided living accommodation living accommodation provided by the employer
  • interest free and low interest (beneficial) loans

You must still report these benefits on a P11D, even if you’re payrolling other benefits for the same employees.

If you choose to payroll company car benefits, you’re not required to submit form P46(Car). But if the car benefit is not being payrolled, you must submit a P46(Car).

Tell your employees

Once you’ve registered to payroll benefits, you must provide your employees with a letter explaining that you’re payrolling and what it means for them. You must also provide your employees with the following information before 1 June after the end of each tax year:

  • details of the benefits that have been payrolled, for example car fuel
  • the cash equivalent of each benefit that’s been payrolled
  • separate details of any benefits you haven’t payrolled

You can include this information on your employees’ payslips or in a separate note or statement.

HMRC recommends that whatever you do, you make it clear to your employees:

  • what benefits have been subject to PAYE tax
  • how much of the value of each benefit you’ve collected and reported tax on

If your employees complete a Self Assessment tax return they’ll need these details so they can report them to HMRC.

New employees

If you have a new employee and you provide them with a benefit that’ll be payrolled, you must explain how the benefit will be taxed.

Tell the employee that:

  • their tax code may be amended to adjust any benefits from previous employments
  • the new benefit won’t be included in their tax code
  • any underpaid tax that they may be paying through their existing tax code will still be collected via the tax code

Class 1A National Insurance contributions (NICs)

You’ll still need to work out the Class 1A NICs on the cash equivalent and complete form P11D(b). The Class 1A NICs liability applies whether you’re payrolling the benefits or they’re reported to HMRC on form P11D.

You must keep a record of cash equivalents for benefits you provide throughout the tax year so that you can accurately report and submit your P11D(b) and the associated Class 1A NICs payment. This must be done by 6 July after the end of the tax year.

Find more information on how to submit a P11D(b) in CWG5:Class 1A National Insurance contributions on benefits in kind.

Example: employer wants to payroll the health insurance benefit to their employees.

They pay £600 per year, per employee for this. They tell their employees that they’re going to payroll this benefit.

They register with the online service and select medical benefit as the benefit they want to payroll.

Their employees’ tax codes automatically change to take out the adjustment for this benefit – the employees are informed by HMRC.

During the tax year, the employer works out the taxable amount of the benefit and adds this to the employees’ actual monthly pay.

The annual cost is divided by the number of paydays in the year, and the employees pay tax on this amount. This can be worked out as:

£600 ÷ 12 = £50 per month

Working out the cash equivalent

You work out the cash equivalent of a benefit for payrolling in the same way as you do for a benefit that you report on a form P11D.

If you’re not sure what the value of the benefit is at the start of the tax year, you can make an estimate of the cash equivalent of the benefit. You can then adjust it later in the year when you know the exact value.

To work out the cash equivalent of the benefits you provide, you can use the following:

The taxable amount must be included in:

  • the P60 at the year-end as part of the ‘total taxable pay in year’
  • any P45 in the ‘total taxable pay to date’ field

Pay periods used to payroll the taxable amount

To work out the taxable amount of the benefit that you payroll each pay day, you need to know the number of days you expect to pay your employees during the tax year. The number of paydays is determined by the interval between each pay day (the pay period). Most employees are paid weekly, calendar monthly or 4 weekly.

Example: employee has a company car with a cash equivalent of £5,200.

Employee is paid weekly (52 pay days). The taxable amount of the benefit is £5,200 ÷ 52 = £100. Employer then adds £100 to employee’s taxable pay at each payday.

Employee is paid monthly (12 pay days). The taxable amount of the benefit is £5,200 ÷ 12 = £433.33. Employer then adds £433.33 to employee’s taxable pay at each payday.

Employee is paid four weekly (13 pay days). The taxable amount of the benefit is £5,200 ÷ 13 = £400. Employer then adds £400 to employee’s taxable pay at each payday.

Irregular pay periods

Irregular pay periods are payments of employment income which have no set pattern. To work out the taxable amount of the benefit, divide the cash equivalent by 365 then multiply by the number of days to the pay period date from the start of the tax year.

Example: employee provided with a car benefit with a cash equivalent £5,200 for the tax year.

The employee is paid on 31 May, which is 56 days into the tax year.

£5,200 ÷ 365 x 56 days = £797.80 value to be added to the taxable pay in that period.

The next time you pay your employee, calculate the period the benefit was provided from their last pay day, rather than from the start of the tax year.

How to deduct or repay tax

You add the taxable amount of the benefit to your employee’s pay to be able to deduct the correct amount of tax.

Example: employee earns £24,000 per year, is paid monthly and has a company car with a cash equivalent value of £5,200.

Before payrolling employee’s monthly taxable pay is £2,000 (£24,000 ÷ 12 = £2,000).

The taxable amount of the car benefit at each pay day is £433.33 (£5,200 ÷12 = £433.33).

Employee’s total taxable pay when payrolling is £2,433.33 (£2,000 + £433.33 = £2433.33).

Once the total pay and the taxable amount of the benefit is recorded on the payroll, PAYE tax should be calculated.

Employee pays towards the cost of a benefit

Employers may agree to employees making a payment towards the cost of a benefit, this is known as ‘making good’. When employees do this, the cash equivalent of the benefit is reduced.

If the full cost of the benefit is made good, there’s no taxable benefit as the employee has paid for it.

Any amounts made good will have no effect on the cash equivalent, meaning the benefit will remain taxable and liable for NICs and can’t be adjusted by the employer.

For benefits which are payrolled, the guidance below explains what to do in different circumstances.

Employee fails to make good a benefit by the final payday

Where the cost of a benefit is known, and the employee hasn’t made good by the final payday, you must:

  • work out the taxable amount of the benefit still to be taxed
  • add the taxable amount to the employee’s final wage payment of the tax year
  • calculate the tax to be deducted

You’re unable to deduct the full amount of tax from the final wage payment, if it exceeds 50% of their pay.

Making good: car and van private fuel benefit

You may have an agreement with your employee that they’ll make good the actual cost of private fuel to avoid a fuel benefit tax charge on a company car or van.

You might not know how much fuel has been purchased by the end of the tax year because either:

  • you’re waiting for the bill for the fuel to be sent from the supplier
  • your employee may not have been in a position to calculate their private miles at 5 April

When you find out the actual cost of fuel for private mileage, your employee has until 1 June to make good all or part of that cost.

If your employee fails to do so, you must:

  • work out the fuel benefit charge
  • add the fuel benefit charge as a taxable amount to the next wages payment on or after 1 June
  • calculate PAYE

If the benefit continues after the 1 June, you must:

  • recalculate car fuel or van fuel benefit for the current tax year
  • include it as a taxable amount of benefit each payday

This is to prevent a similar occurrence at the end of the next tax year.

Making good: credit tokens

You may have an agreement with your employee that they can use your business credit card but that they will make good any private costs they incur using the card.

You might not know how much your employee spent on private goods and services using the credit card by the end of the tax year. For instance:

  • you’re waiting for the bill to be sent from the provider
  • your employee may not have details of the transaction

Once the amount is known, your employee has until 1 June to make good the actual cost of the benefit.
If your employee fails to make good all or part of the cost by 1 June following the end of the tax year, you need to:

  • work out the amount of the benefit still to be taxed, taking into account any previous amounts made good
  • Add the amount to the next payment of wages on or after 1 June
  • payroll the cost of any use of the credit card in Year 2, without allowing the making good promise

Example:

An employee has use of a company credit card for the tax year and the amount spent is £120. By prior agreement at the start of the tax year, the employee promises to and makes good £30. That means the taxable amount at the end of the year is £90.

The employee also agreed at the start of the tax year that the employer would tax £5 per month through payrolling in anticipation of a benefit. So £60 of the credit card bill was payrolled.

At the end of the tax year, the employer takes away the payrolled amount of £60 from the taxable amount of £90. This leaves an amount of £30 still to be taxed.

If the employee doesn’t make good the amount of £30 by 1 June, then that’s added to the next payment of wages on or after 1 June.

If the employee uses the credit card to buy private goods and services in Year 2, the whole amount will be taxed through payrolling in that year without taking into account any amounts made good. This prevents the employee from delaying payment of tax as happened in Year 1.

You may need to recalculate the taxable amount.

Employee’s tax exceeds 50% of their pay

Employers must not deduct more than 50% in tax from an employee’s pay. This is called the overriding limit and ensures that employees aren’t left with too little pay to cover their living costs.

In some circumstances a high value benefit or expense, combined with low pay, could mean that the employee takes home little or nothing. This might be where an employee is being paid Statutory Sick Pay.

You’re allowed to stop payrolling benefits if necessary where deducting the tax for the benefit means that the tax payable will exceed 50% of the employee’s cash pay.

You have two options:

Option 1

You can exclude the employee from payrolling using the online service. If you exclude them for the rest of the tax year, the benefit they receive will be reintroduced into their tax code. Your employee should check that the amended code includes the correct amount of benefit so that they’re not overpaying or underpaying tax.

You’ll need to send a P11D after the end of the tax year for the excluded employee. The amount on P11D and any tax already paid through payrolling will be included in the employee’s tax calculation after the year end.

If you want to restart payrolling in the next tax year, you will have to wait until after you have sent your P11D, as it’s a trigger for amending tax codes. To restart payrolling, you can review the employee exclusion list and remove the employee.

Option 2

You can keep the employee in payrolling and carry forward the taxable amount of the benefit into future pay periods in that tax year.

Example:

An employee is paid £1,000 per month and their tax code is 1060L.

They have a car benefit which adds £4,000 to their taxable pay in September, meaning they have a taxable pay of £5,000 for September.

You use the tax tables to work out the tax due to deduct. Under tax code 1060L this is £1116.25.

You can only deduct up to £500 in September (50% of their salary £1,000).

The uncollected tax of £616.25 is carried forward to the next payday.

The total taxable pay to date in October Full Payment Submission (FPS) includes the full benefit.

In October up to £500 tax can be collected and the remaining tax outstanding on the benefit and on October’s salary will carry forward to November payday.

If there are insufficient pay periods to recover the uncollected tax, then once the final FPS is made, any underpaid tax will be included in an end of year tax calculation and sent to the employee by HMRC.

Changes affecting benefits and expenses

If things change, such as an employee leaving or a company car change, you’ll need to recalculate the taxable amount to go through your payroll. Find more information about these and other changes at Payrolling: changes affecting benefits and expenses.

Source: HMRC

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