Expenses and benefits are often considered a minefield by many. However, HMRC have recently come up with a solution that solves all of these problems. From 6th April 2017, HMRC now enable employers to include employees expenses and benefits in their pay. Rather than through a tax code. In this blog I’m going to explain how this works, and how you go about registering for the payroll service. If you would like more specific information on how Blow Abbott provide payroll services in Lincolnshire, contact us today.
First of all what benefits can you payroll?
One of the big advantages of payroll services in Lincolnshire is that you can payroll all benefits. Apart from interest free and low interest loans, and employer provided living accommodation.
The main benefits employers opt to payroll receive are company cars and medical insurance.
How does this work?
Say for example an employer wants to payroll medical insurance for the tax year.
Example: An employee has a medical benefit of £800 per annum that they wish to payroll. Rather than add to the P11D.
The employer/payroll provider would register with the HMRC online service. They would then select that they wish to payroll the medical benefit. There is no need to select particular employees – HMRC will be aware of the employees that have the benefit from previously submitted P11d’s.
After the service is registered, this will generate a change in tax code for all employees with the medical benefit.This will take out the adjustment for the benefit and increase the tax code).
How does this work from here you may ask? At the beginning of the tax year the employer is required to work out the taxable amount for the benefit. This then has to be add this to the employees weekly/monthly pay.
To do this you work out the annual cost, this is then divided by the number of pay days in the year. Below are examples of weekly/monthly pay:
Weekly: £800 (annual benefit cost) /52 = £15.385 per week
Monthly: £800 (annual benefit cost)/12 = £66.666 per month
These amounts would then be added to the employees pay. Should there be any changes to the amount, these can be adjusted in year. This is a benefit as it means any adjustments are real time.
So now you know how to work out the annual cost how does this work? Below is a working example:
Steve Earns £30,000 per annum (£2500 per month)
His medical benefit is £800 per annum (£66.67 per month)
Steve’s total taxable pay per month should now be £2500 + £66.67 = £2566.67
These are slightly different to calculate the benefit. For a company car, you have to work out the cash equivalent in the same way you would for a P11D. There are a number of ways you can work this out. The easiest and most efficient being HMRC’s online calculator. Just put in the information on the vehicle, and bang you get an instant result. Or contact us directly for more information on payroll services in Lincolnshire.
After receiving the results you would then work out the annual cost and payroll. In exactly the same way as the medical insurance.
This service doesn’t get rid of the P11D completely
The P11D is not cut out completely as employers/payroll providers still need to work out the Class 1A. On the cash equivalent amounts.
Rather than submitting a P11D you would submit a P11D(B) just reporting the Class 1A. These have to be submitted by 6th July after the end of the tax year you are payrolling. So if you decide to payroll for 2018/10 tax year then a P11D(B) will be required by 6th July 2019.
So now you have more of an idea of how this payroll service, how do you go about registering?
You must log onto the HMRC website and register using the payrolling expenses and taxable benefits section. An important point is that you MUST register by 5th April to payroll for the following tax year.
Once logged on to the service you will be able to select which benefits as a company you wish to payroll. So it may be that you wish to payroll the company cars and not the medical.
After the form has been sent in this will generate new tax codes, for all employees with the benefit in question. Please keep an eye on this. I would personally phone HMRC if you do not receive a new code within the month.
Immediately after you register you must write to each employee individually. Explaining that you have now opted to payroll their benefit. This doesn’t end there at the end of each tax year you must give the employees the following information (by 1st June):
- A list of the benefits you have payrolled.
- The cash equivalent amount.
- Details of any benefits that haven’t been payrolled will also need to be noted down.
What if a change to benefit occurs in year?
If an employee changes their vehicle in the year, for example, you would need to re-calculate the amount to be payrolled.
How does it work if an employee pays towards the cost of the benefit?
If an employee ‘makes good’ then the cash equivalent would be reduced to take this into account. Any payments towards the benefit (that the employee makes) needs to be done before the end of the tax year. If they don’t pay this by the final pay date of the tax year they will have to have this amount payrolled on the last payment of the tax year. To avoid any underpayments.
The option is yours…
After reading this you may still want to stick to the old fashioned P11d. However, I believe the option to payroll the benefits is moving with the times. It means any changes can be reported real time.