Peter Bickley shares his thoughts on the advantages and considerations when payrolling benefits.
A number of employers have been informally accounting for tax on employee provided benefits in kind and expenses (collectively referred to in this article as BIK) through payroll for many years. However, it was only with effect from 6 April 2016 that the process was legislatively formalised. In the February 2023 issue of Employer Bulletin, HMRC announced that it would no longer accept informal payrolling arrangements from 6 April 2023.
A once-a-year opportunity
Employers have a choice – they don’t have to payroll BIK. However, employers wishing to payroll BIK must register with HMRC by 22:00 on 5 April prior to the start of the tax year. This enables HMRC to remove the BIK from the tax PAYE code numbers of the affected employees. Employers can choose to payroll for some employees by excluding others.
By contrast, new employers who set up their first payroll in the tax year do not have a choice. They cannot start payrolling until the next tax year (ICAEW’s Tax Faculty has raised this with HMRC).
Currently, agents are unable to payroll BIK for their clients. However, the Spring Budget 2023 announced that the government will deliver IT systems to enable agent access, to reduce the burdens on employers and enable agents to support their clients.
How much administration does payrolling save?
Although payrolling BIK obviates the need for employers to submit forms P11D for the BIK that are being payrolled, class 1A national insurance contributions (NIC) still need to be reported to HMRC. The report must be made on form P11D(b) by 6 July following the end of the tax year and the NIC paid by 19 or 22 July by cheque or electronic banking respectively, just like for BIK reported on forms P11D.
Instead of the 6 July P11D deadline, 31 May is an important date for payrolling BIK. The employer must notify employees by 31 May of the cash equivalent of each BIK that has been payrolled. There is also a requirement to tell employees, “you will not be taxed twice”.
Payrolling does not remove the requirement for BIK specialist knowledge – that knowledge is still needed but in real time
However, all these 31 May obligations can be met by prior communication and engagement with employees AND ensuring that payrolled BIK are obvious on the final payslip of the tax year and/or P60 as a notional item (ie, something that is subject to tax but not paid in cash).
Payrolling, though, does not remove the requirement for BIK specialist knowledge. Put simply, that knowledge is still needed but in real time.
Can all BIK be payrolled?
All BIK can be payrolled save for beneficial loans and employer-provided accommodation. Although the law governing the valuation of the BIK on loans would need to be changed to make it practicable to account for this via payroll in real time, ICAEW sees no reason why the BIK arising from accommodation could not be payrolled.
There will be some BIK that are easier to payroll, such as medical and dental insurance. Other BIK such as cars, where information about mid-year changes will need to be captured in ‘real time’, may require process changes in advance of implementing payrolling.
Some BIK are easier to payroll, such as medical and dental insurance
Employers don’t have to payroll all BIK that they offer to employees. They might choose to payroll widely provided benefits that are easy to payroll (eg, medical insurance), but report others on form P11D (eg, cars) following the end of the tax year.
How do the calculations work?
The cash equivalent of the BIK is worked out in the same way as for P11D reporting and divided by the annual number of paydays. For example, if employees are paid calendar monthly, divide the annual amount by 12, or if four weekly divide by 13 (or maybe 14), if weekly, divide by 52 (or maybe 53). Make the analogy, perhaps, to the way that we pay an employee an annual salary, divided by the pay frequency (though we don’t have to consider the week 53, 54 and 56 implications!).
If the payrolled BIK value is not exactly known, then it can be adjusted later in the tax year – very unlike the situation where an employee’s salary is not known!
Where BIK are provided under optional remuneration arrangements (OpRA), if the arrangements started on or after 6 April 2017 the value of the BIK is the higher of the amount of salary given up and the earnings charge under the normal BIK rules. Payrolling does not change the interaction with OpRA meaning that the current exemptions apply (cycle-to-work, ultra-low emission cars, etc).
Where the employee ‘makes good’ the benefit (ie, pays back the employer the value of the BIK to be included in payroll), the amount is deducted from the value of the BIK to be accounted for via payroll. The general rule is that where an employee has not made good by 6 July after the end of the tax year, the amount outstanding becomes taxable and liable to NIC. However, there are refinements for payrolling, as follows.
Where the value of a BIK is known and the employee has not made good to the employer by the final payday of the tax year, the taxable amount is added to the employee’s pay for the final payday. If this makes the tax to be deducted from pay more than 50% of their pay, the excess cannot be recovered (note, this 50% consideration applies to PAYE in general and is not reserved for payrolling BIK). If there is an excess liability outstanding at the year end, HMRC will include this in the P800 end-of-year tax reconciliation provided to the employee (or in the self assessment (SA) calculation if the taxpayer is in SA).
When it comes to making good car and van private fuel benefit and the private costs incurred using a company credit card (ie, credit tokens), there is a grace period, recognising that this information might not be available in time for the final payday of the year. However, despite the 6 July general rule above, the deadline for employees to make good these costs is 31 May following the end of the tax year. If the employee has not made good by that date, HMRC guidance says that the payrolled value in the current year should be adjusted to take this into account (subject to the 50% rule as above). HMRC advises that this is to prevent a tax underpayment occurring for the same reason in that following year.
Avoiding the 50% rule/making good issue
One way of ensuring that tax is collected where the 50% rule/making good issue applies in-year is to use the online service to remove the employee from BIK payrolling for the remainder of the tax year. This will result in HMRC amending the employee’s code number and the employer will need to report the value of non-payrolled BIK on form P11D. This may be a good option if the value of non-made good items in the payroll has the effect of taking the employee into a higher tax bracket (or above £100,000 where the personal allowance starts to be tapered).
If the employee leaves and not all the value of the BIK has been accounted for, the taxable amount not hitherto payrolled should either be included with the employee's final taxable pay or will need to be reported on form P11D. Remember the above 50%/making good issue!
If a change occurs, for example to the value of a BIK or an employee leaves, which cannot be accounted for in-year via payroll because the final full payment submission (FPS) has been submitted, the tax should be accounted for on the first payday in the following year. To prevent creating discrepancies in HMRC’s records, the employee should report in their SA return the figures on form P60 (despite this being technically wrong). However, the amount of class 1A NIC reported and paid by the employer for the year should be based on the corrected amount of the BIK (rather than the employer reporting in the following year the amount by which the BIK changed).
The question arises of what should the employer do if they cannot account for a change or make a correction by the times set out above? The answer is to put things right as soon as possible (ie, in the next possible payroll run).
Time to think
Now that the 2022/23 P11D filing season is over, employers that haven’t considered payrolling might want to reflect on whether to implement payrolling benefits. ICAEW considers that payrolling BIK is the future, though it is not as simple as HMRC would have us believe. Some employers may not be able to get BIK information in real time, to say nothing of the process, procedure, administration, and system changes that might be required to make it work.
ICAEW considers that payrolling BIK is the future, though it is not as simple as HMRC would have us believe
By far, though, the biggest consideration is the communication and engagement needed with employees and all stakeholders, for example the providers of the benefit information such as fleet managers.
Payrolling is voluntary now. But will it become mandatory in the future? It’s time to give it consideration – remembering the deadline for payrolling in 2024/25 of 22:00 on 5 April 2024.
Peter Bickley, Technical Manager, Employment taxes and NIC, Tax Faculty
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