A guide to employee benefits

Are you required to complete forms P11d? Don’t miss the deadlines

A P11d is required for each employee (including directors) who receive any benefit or expenses payments whatsoever from the company, unless payrolled (see below). There are only two exceptions:-

1. The only benefits received by employees/directors were exempt from tax, and
2. All expenses were allowable business expenses covered by a statutory exemption.

Statutory exemptions for allowable business expenses replaced the previous system of dispensations from 6 April 2016.  The responsibility for identifying expenses qualifying for the exemption falls on the employer and any non-qualifying expenses will need to be reported on forms P11d, regardless of whether they were previously covered by a dispensation.

From 6 April 2017 you may be required to report on the declaration form P11d (b) and pay the employers Class 1A NIC on benefits provided via salary sacrifice schemes and/or flexible benefit packages, now referred to as Optional Remuneration Arrangements (OpRAs), if your scheme was not in place before that date.  More on OpRAs below.

Payroll the benefits instead but you need to act early!

You need to have applied and obtained agreement from HMRC before the start of the tax year to payroll benefits.  Therefore, if you want to make life easier for the 2020/21 tax year, you need to act before 5 April 2020.  Applying online will be quicker. 

Apart from making it easier for the payment of tax by employees and reducing queries following an unexpected tax bill, payrolling benefits should reduce the employer’s admin burden once in place.  You will no longer need to provide a P11d to employees whose benefit was payrolled, but initially you will need to communicate what is being payrolled and what this means for them. 

There is the option to exclude employees who do not wish to be included but, once excluded, they cannot reverse the decision until the following tax year.

After registration, HMRC will automatically identify those employees participating and have any existing adjustment in their tax code removed.  Your registration will be ongoing, so you only need to tell HMRC if you decide to deregister and you should do this before the start of the next tax year.

At the end of each tax year, you need only include the amount of employee benefits on your end of year declaration form P11d (b) to account for, and pay, the employer’s Class 1A NIC.  If it is not clear from their payslips, you will need to confirm to the employee by 1 June the cash equivalent of each benefit that has been payrolled as well as those which have not been payrolled.  Everything except the following can be included in payroll:

• Employer provided Living Accommodation
• Interest Free and Low Interest (Beneficial) Loans

Avoiding tax bills on benefits-in-kind

If you would rather avoid being taxed on a benefit-in-kind provided by your employer, you have typically been able to do so by repaying (or “making good”) the cost to the company.  The deadline is generally 6 July following the tax year in which the benefit is received in order for the repayment to be taken into account.  

For benefits which are payrolled (and depending on the benefit type) settlement may need to take place as early as the end of the tax year.  Is important you ensure ‘making good’ does not take place too late as this will not be taken into account when working out the benefit which will be subject to tax and NIC.

For example:

• Where the benefit amount is known i.e. private medical insurance, the amount must have been ‘made good’ by the final payday of the tax year. 
• Where the benefit amount is not known. i.e. actual cost of private fuel, the amount must have been ‘made good’ by 1 June following the end of the tax year.

Salary sacrifice & flexible benefits packages – the new rules

HMRC are increasingly concerned that these schemes have been over used and that there is a loss of tax and NIC to the Exchequer as a result.  Therefore, from 6 April 2017 the new rules were triggered, and such schemes have been absorbed into a new regime called Optional Remuneration Arrangements (OpRAs).

Some benefits are, of course, not affected by the new rules, two examples being payments into pension schemes and child care vouchers.  The new rules are delayed for the benefit of a car with emissions of more than 75g/km, living accommodation and school fees which are protected until the earlier of variation, renewal or modification of the arrangement, or 6 April 2021.

The value of the benefit to be treated as earnings for tax and NIC purposes is the greater of:

• The amount of salary given up by the employee in return for the benefit; and
• The taxable benefit calculated under the normal benefit in kind rules, ignoring any amount made good by the employee.

For example:

• An employee gives up £1,000 of salary for benefits that are valued at £900.  The higher value of £1,000 is used for tax and NIC purposes.
• An employee chooses between a pay rise of £2,000 and a car (which is not a low emission vehicle) where the case equivalent of the car is £2,200.  The higher value of £2,200 is used.

Would you like to settle the tax & NIC for the benefit you provide to your staff?

For minor or irregular expenses or benefits you can apply to HMRC, in writing before the start of the tax year for a PAYE Settlement Agreement (PSA).  This allows the employer to make one annual payment to cover all the tax & NIC due. It is best therefore to do this sooner rather than later.  The reporting is treated differently if the agreement is obtained after the start of the tax year.

If a PSA is in place at the start of the tax year, you do not need to payroll the benefit/expense, prepare a P11d or include them on the end of year declaration form P11d(b).  You will settle the tax and Class 1B NIC as part of your PSA.  You can amend or cancel your PSA at any time.

If you are unsure whether you have a reporting requirement or have any other queries, please contact us.