Benefits
As well as a salary, companies will often offer additional ‘non-cash’ benefits to employees as part of their package. Unlike with salary, where both PAYE and National Insurance are automatically deducted from an employee’s net pay, non-cash benefits (generally) only attract PAYE deductions, although the employer will still pay National Insurance.
Reporting benefits
Before the introduction of payrolling benefits in kind (PBIK) in April 2016, benefits offered to employees were reported annually on a form called a P11D. This was an onerous task for many companies requiring them to summarise the annual offerings to all staff, value the benefits and report this to HMRC. This then affected employee tax codes for the following tax year in order to collect the tax due on the benefit, and calculated a Class 1A liability for the company to pay.
With the introductions of PBIKs, the value of most benefits is simply added to the employee’s pay slip and the necessary tax is deducted each month. This has a number of benefits including timely and accurate real-time reporting to HMRC, transparency for the employee around the cost of their benefits and up to date tax deductions based on actual amounts received for benefits rather than estimates for the coming year.
Registering to use PBIKs is an annual process and must be done before the tax year begins. Failure to do so will mean a year of manual admin so getting ahead of the deadline is important and will save a lot of time and hassle.
From the company’s perspective the administration burden is lessened and although the requirement to calculate their annual Class 1A NIC liability remains (via form P11D(b)), this is much easier to prepare using summary payroll data already processed during the preceding tax year.
Not all benefits can be processed as a PBIK and exceptions are listed on the HMRC website. Coverage of PBIKs however is very broad and for many companies will capture everything offered.
Notifying employees and calculating benefits
By 1st June each year employees must be notified of the benefits that will be put through their payroll for the current tax year. In reality companies would want to notify staff before the April pay slip is prepared so that employees are not blindsided by an unexpected change in the value of a benefit, especially new starters.
There are many different benefits that can be offered and all need to be valued in order to include them on a pay slip. For most benefits this is very simple and there is no subjectivity or estimation required.
Private medical insurance is a common benefit offered to senior staff in many companies. All of the big insurance companies will provide the necessary data valuing the insurance on a per employee basis which companies can simply add to their payroll system. Each year when the insurance premiums increase this will then be amended keeping everyone up to date and ensuring the correct tax is paid.
Company cars are becoming a less common benefit but are still used and add a layer of complication. HMRC publish up to date guidance which can be found on their website, and many car leasing companies will provide certain data to assist with the valuation much like private medical companies. With changing technology and emissions rules however, staying on top of legislative changes and what this does to the value of a company car benefit is very important and can be quite onerous.
Benefits which cannot be processed through payroll
As of writing, some benefits such as low interest or interest-free loans over £10,000 cannot be added to an employee’s pay slip and must still be reported annually on a P11D. This is an annual administrative task specific to the relevant employees. In the same way that a PBIK would be calculated, the P11D benefit has to be valued following current HMRC guidance and reported manually. The company will also have to include these benefits on the P11D(b) form alongside the PBIKs also offered.
Record keeping
Detailed records to support submissions to HMRC are necessary and investigations can be opened for up to two years after filing. Most of the records will already be within the payroll system, however supporting documentation from external sources such as private medical insurance data and lease car information must also be available. Manual calculations where P11Ds are necessary are especially important as there is no direct link back to payroll data.