Understanding Taxable Benefits: The Essentials of Payrolling

Employers have the option to streamline the administration of taxable benefits in kind by incorporating them directly into payroll—a process known as ‘payrolling.’ This method offers an alternative to the traditional post-tax year reporting on an employee’s P11D form. However, to utilise this approach, employers must register the benefits for payrolling with HMRC before the tax year commences. Once registered, these benefits remain in the payrolling system until explicitly deregistered by the employer, requiring action also before the start of a new tax year.

Understanding Payrolling

Payrolling taxable benefits means treating the value of these benefits as part of the employee’s salary or wages, spreading the taxable amount over the year’s pay periods. For instance, if an employee benefits from a company car valued at £4,800 annually, this is effectively divided into monthly increments of £400, added to the gross pay for tax calculation purposes. It’s crucial to note that while this amount is included for tax purposes, it is exempt from National Insurance contributions calculations. Instead, these benefits are considered in the Class 1A National Insurance contributions, reported annually on form P11D(b).

Exclusions and Requirements

Currently, most benefits can be included in the payrolling process, with notable exceptions being employment-related loans and living accommodations. For employers considering payrolling benefits for the first time in the 2024/25 tax year, registration with HMRC’s online service must be completed by April 6, 2024. Likewise, any changes to the selection of payrolled benefits, including cancellations, must be processed through the same online system before the commencement of the new tax year.

Preparing for Mandatory Payrolling

In a significant development, HMRC announced in their January 2024 simplification update that payrolling of benefits will become mandatory by April 2026. This forthcoming change underscores the importance for employers currently outside the payrolling system to begin familiarizing themselves with the process. Transitioning to payrolling not only facilitates smoother operations but also eliminates the need for filing P11Ds for expenses and benefits—though the requirement to submit a P11D(b) remains.

Action Steps for Employers

As we approach the 2024/25 tax year, employers should:

  • Review the benefits they plan to offer and decide which to include in the payrolling process.
  • Register any new benefits for payrolling with HMRC’s online service by April 6, 2024.
  • Reassess currently payrolled benefits to confirm continuation or to deregister as needed.
  • Consider the strategic benefits of early adoption of payrolling in anticipation of the 2026 mandate.

Employers paying benefits in kind are encouraged to explore the advantages of payrolling. Not only does this approach streamline tax reporting and reduce administrative burdens, but it also ensures greater clarity and consistency in tax treatment for employees. With the transition to mandatory payrolling on the horizon, proactive engagement with the process will position employers favourably for future compliance.




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