Next month a number of changes will be introduced which impact on the operation of payroll by employers.
We set out below the major changes:
- Abolition of the threshold for the taxation of benefits in kind for employees who earn at a rate of less than £8,500 a year
Currently directors and employees who earn over £8,500 per annum are taxed on benefits in kind such as cars, beneficial loans, medical insurance etc. whereas lower paid employees are not.
The £8,500 threshold has been in place for over 30 years, and is to be removed from April after which all benefits will be taxable regardless of the employee’s total earnings.
- Exemption for reimbursement of business expenses
Currently many employers will have dispensations in place for the tax-free reimbursement of business expenses paid to employees. However these dispensations fall away from April 2016, and are replaced with a new statutory exemption for business expenses.
The exemption applies to expenses, allowances and scale rates which would attract a deduction under the current legislation.
Employers may also apply to HMRC to agree a flat rate allowance, which once approved will also qualify for the reimbursed business expense exemption.
HMRC have issued an online application form to allow employers to request approval for these bespoke amounts. This should state the rate that the employer wishes to pay and also needs to demonstrate that the amount is a reasonable estimate of the amount of expenses actually incurred by the employees.
To establish these amounts, HMRC have confirmed that the employer should carry out a sampling exercise to verify the actual expenses incurred by employees.
In addition, employers will need to have a checking system in place which ensures that the payments or reimbursements are only made on occasions where the employee would be entitled to a deduction from their earnings and that the employees have actually incurred and paid the amounts.
Once approval has been given by HMRC, they will issue an approval notice which sets out the date from which the approval is given and what expenses are covered. It will also state the date when the approval notice ends which will be no later than five years from the start date.
- Payrolling benefits in kind
Employers are now able to register with HMRC to collect the tax due on the majority of benefits provided to employees via the payroll, with the exception of:
- vouchers and credit cards
- living accommodation
- interest free and low interest (beneficial) loans
Before using this service you will need to ensure your payroll software allows you to collect the right amount of tax on benefits and expenses. You will also need to align your payroll software and register to payroll using the new service by 5 April 2016. You won’t be able to register after this date for the 2016 to 2017 tax year as HMRC can’t process changes in-year.
Once registered you must continue to payroll the benefit or expense you’ve registered for the whole tax year or for as long as you provide it.
Class 1A National Insurance contributions will continue to be payable with an annual P11D report.
Further information with details of how to register may be found at http://bit.ly/1VNWlPP
- Trivial Benefits Exemption
From 6 April 2016 trivial benefits provided to employees may be exempt from tax where the following conditions are met:
• the cost of providing the benefit does not exceed £50
• the benefit is not cash or a cash voucher
• the employee is not entitled to the voucher as part of a contractual arrangement (including salary sacrifice)
• the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties
• where the employer is a ‘close’ company and the benefit is provided to an individual who is a director, member of their household or their family, then the exemption is capped at a total cost of £300 in a tax year.
If any of these conditions are not met then the benefit will be taxed in the normal way subject to any exemptions or allowable deductions.
One of the main conditions is that the cost of the benefit is less than £50, if the cost is above £50 the full amount is taxable, not just the excess over £50. The cost is the cost of providing the benefit to each employee not the overall cost to the employer. Where the individual cost for each employee cannot be established, an average could be used.
Further details on how the exemption will work, including family member situations, are contained in HMRC’s guidance. However if you are unsure please do get in touch before assuming the trivial benefit you are about to provide is covered by the exemption.
Should you wish to discuss how these changes may impact on your business please contact either Simon Hopwood on 0191 2811292, or your usual Ryecroft Glenton contact.