Annex 1 – payrolling examples for different scenarios
Payrolling examples for different scenarios including gym membership, classic cars, accommodation, loans and dealing with different payroll frequencies.
In April 2027 an employer provided gym membership to an employee as a benefit in kind (BiK). The employee is a basic rate taxpayer which means they pay Income Tax at a rate of 20%.
The annual cost to the employer of providing this benefit is £600. In order to calculate the value to be payrolled, the employer will divide the cost of the BiK over the remaining pay periods in the tax year.
Step-by-step breakdown of calculation
-
Annual taxable benefit – cost of the gym membership is £600 per year
-
Monthly payrolling – the monthly taxable amount is £600 ÷ 12 = £50 per month. This £50 is added to the employees taxable pay each month (not their gross pay for National Insurance contribution or pension).
-
Monthly tax deduction – the employer calculates the Income Tax due in the normal way on the total taxable pay using the Tax Tables and the employee’s tax code. In this example, the employee pays tax on the benefit at 20% (£50 × 20% = £10 per month). So, the employee pays £10 in Income Tax each month for the gym membership benefit.
-
Payroll reporting – the employer includes the £50 in the employees’ taxable pay by Real Time Information (RTI) (Full Payment System (FPS)). The Income Tax is deducted through PAYE and reported alongside any tax due on the employee’s earnings. Class 1A National Insurance contribution is calculated and paid by the employer at the same time as other amounts of tax and National Insurance contributions due for the tax month – this is not deducted from the employee’s pay. Changes to the cost of the gym membership may affect the taxable value payrolled employers will need adjust the value in year for the remaining pay periods.
-
End-of-year process – in the rare case that there is a change to the cost of the gym membership that was not reasonably known during the tax year, the employer will have the opportunity to correct this at the end of the year. For instance, if it is not known in April what the cost of the gym membership is, the previous year’s cost could be used. Once the actual cost is known, the cash equivalent can be updated in subsequent pay periods. More details on the end of year process will be provided in updates to this guidance in 2026.
Currently the value of a classic car is worked out at the end of the year when reporting a classic car BiK using a P11D. From April 2027, in order to simplify the calculation and reporting for payrolling, the market value of a classic car will need to be determined at the beginning of the year. Legislation and technical guidance will be changed and published in draft in early 2026.
Example 1 – current s.147 classic car rules, MV determined at year end
On 1 May 2027 a company buys a car for £15,000 and provides it for private use to the director. It was first registered in 1981 and had a list price then of £2,800 (assume this can be established with reasonable certainty). At year end on 5 April 2028, it has a market value of £17,500.
In this example, the market value of £17,500 determined on 5 April 2028 is to be used at step 3 of s.121(1) ITEPA.
Normal calculation: steps 1 to 4 for 2027 to 2028
| Step | Method | Amount | Running total |
|---|---|---|---|
| Step 1 | List price in 1981 | £2,800 | £2,800 |
| Step 2 | Accessories – assume that renovations simply involve provision of replacement accessories (read EIM24255) and that no additions are necessary at step 2 | £0 | £2,800 |
| Step 3 | Less capital contributions from the director | Not applicable | £2,800 |
| Step 4 | Interim sum (figure at step 4 without the classic car rules; amount carried forward from step 3 from 2011 to 2012) | Not applicable | £2,800 |
Consideration of classic car rules
However, the normal calculation is not the end of the story. The conditions in section 147(2) are fulfilled:
- the age of the car at 5 April 2028 is at least 15 years
- its market value on this date is assessed as £17,500, which is more than £15,000
- that market value exceeds the amount carried forward from step 3 of section 121(1) (£2,800)
The car is therefore a classic car within section 147 (read EIM24400 onwards). Section 147(2) therefore specifies the following action for the amount carried forward from step 3 substitute the market value of the car for the year less any deductions under subsection (6), capital contributions to classic cars.
Calculation using classic car rules: steps 1 to 4 for 2027 to 2028
Section 121, step 3 – substitute the amount carried forward from step 3 under section 121(1) with the market value of the car less any capital contributions (£17,500). This figure is the interim sum (final figure at step 4).
Example 2 – new s.147 classic car rules, MV determined at beginning of year
On 1 May 2027 a company buys a car for £15,000 and provides it for private use to the director. It was first registered in 1981 and had a list price then of £2,800 (assume this can be established with reasonable certainty). The employer plans to renovate the car during the year and it is estimated that come 5 April 2028 the car will then have a market value of £25,000.
In this example, the employer purchased the vehicle at its market value price. Therefore, the market value determined on 1 May 2027 of £15,000 is to be used at step 3 of s.121(1) ITEPA.
No changes are required to the calculation as the market value is now determined on the first day of the year or the first day it is made available to the employee (whichever is later).
Normal calculation: steps 1 to 4 for 2027 to 2028
| Step | Method | Amount | Running total |
|---|---|---|---|
| Step 1 | List price in 1981 | £2,800 | £2,800 |
| Step 2 | Accessories – assume that renovations simply involve provision of replacement accessories (read EIM24255) and that no additions are necessary at step 2 | £0 | £2,800 |
| Step 3 | Less capital contributions from the director | Not applicable | £2,800 |
| Step 4 | Interim sum (figure at step 4 without the classic car rules; amount carried forward from step 3 from 2011 to 2012) | Not applicable | £2,800 |
Consideration of classic car rules
However, the normal calculation is not the end of the story. The conditions in section 147(2) are fulfilled:
- the age of the car at 1 May 2027 is at least 15 years
- its market value on this date is assessed as £15,000, which meets the £15,000 or more test
- that market value exceeds the amount carried forward from step 3 of section 121(1) (£2,800)
The car is therefore a classic car within section 147 (read EIM24400 onwards). Section 147(2) therefore specifies the following action for the amount carried forward from step 3 substitute the market value of the car for the year less any deductions under subsection (6), capital contributions to classic cars.
Calculation using classic car rules: steps 1 to 4 for 2027 to 2028
Section 121, step 3 – substitute the amount carried forward from step 3 under section 121(1) with the market value of the car less any capital contributions (£15,000). This figure is the interim sum (final figure at step 4).
Example 3 – new s.147 classic car rules, MV determined at beginning of year or first made available to employee
On 1 May 2027 a company buys a car for £15,000 and immediately starts renovations. The car is not provided to any employee for private use until 1 December 2027. On the 1 December 2027 its market value is now £25,000 due to renovations which have increased its value. It was first registered in 1981 and had a list price then of £2,800 (assume this can be established with reasonable certainty).
In this example, the market value of £25,000 determined on 1 December 2027 is to be used at step 3 of s.121(1) ITEPA.
This is because the market value is determined at the start of the year or when first made available to the employee (whichever is later).
Normal calculation: steps 1 to 4 for 2027 to 2028
| Step | Method | Amount | Running total |
|---|---|---|---|
| Step 1 | List price in 1981 | £2,800 | £2,800 |
| Step 2 | Accessories – assume that renovations simply involve provision of replacement accessories (read EIM24255) and that no additions are necessary at step 2 | £0 | £2,800 |
| Step 3 | Less capital contributions from the director | Not applicable | £2,800 |
| Step 4 | Interim sum (figure at step 4 without the classic car rules; amount carried forward from step 3 from 2011 to 2012) | Not applicable | £2,800 |
Consideration of classic car rules
However, the normal calculation is not the end of the story. The conditions in section 147(2) are fulfilled:
-
the age of the car at 1 December 2027 is at least 15 years
-
its market value on this date is assessed as £25,000, which is more than £15,000
-
that market value exceeds the amount carried forward from step 3 of section 121(1) (£2,800)
The car is therefore a classic car within section 147 (read EIM24400 onwards). Section 147(2) therefore specifies the following action for the amount carried forward from step 3 substitute the market value of the car for the year less any deductions under subsection (6), capital contributions to classic cars.
Calculation using classic car rules: steps 1 to 4 for 2027 to 2028
Section 121, step 3 – substitute the amount carried forward from step 3 under section 121(1) with the market value of the car less any capital contributions (£25,000). This figure is the interim sum (final figure at step 4).
Currently, the cash equivalent of an employment-related living accommodation benefit is calculated retrospectively at the end of the tax year using actual obtained figures. If employers choose to voluntary payroll this benefit, we expect the cash equivalent to be estimated at the start of the year and corrected either in year or using the BiK update process after the end of the tax year once actual figures are known. Associated living costs, where accommodation is provided, can be estimated and corrected once actual figures are known. A decision will be made in the first half of 2026 on whether it will be mandatory to payroll these costs.
The following examples are on the basis that the employee’s tax code is operated on a cumulative basis.
Here are some examples that illustrate how employment related living accommodation can be payrolled:
Properties under £75,000 in value
For properties valued at under £75,000, the calculation does not take into account HMRC’s official rate of interest. This rate is only used for properties valued at over £75,000.
On 1 February 2020 an employer rented living accommodation for £3,000 a year that an employee occupied from that date at a rent of £300 a year. The employee had since continued to live there. It is now the end of the 2027 to 2028 tax year.
At the end of the tax year, the actual cash equivalent is calculated as follows:
Rent paid by employer = £3,000
Less rent paid by employee = £300
Equals actual cash equivalent (£3,000 – £300) = £2,700
Mandatory payrolling requires reasonable estimates to input into the calculation at the start of the tax year to ascertain the expected cash equivalent of the benefit.
The scenario is the same, but it is now the start of the 2027 to 2028 tax year instead of the end. The employer and employee have agreed the employee will continue to occupy the accommodation for the duration of the upcoming tax year – the same living arrangements and financial arrangements are expected to continue.
At the start of the tax year, the expected cash equivalent is estimated as follows:
Rent to be paid by employer = £3,000
Less rent to be paid by employee = £300
Equals expected cash equivalent (£3,000 – £300) = £2,700
Once the estimated tax liability of an employer-provided living accommodation benefit is established, this could then be spread across the employee’s pay periods so that tax can be collected by the payroll.
Continuing on from this scenario, in the time that the employee has been living at this accommodation, they have always been paid monthly. This is expected to remain the case in the upcoming 2023 to 2024 tax year.
During the tax year, the expected cash equivalent can be used to enable payrolling.
Expected cash equivalent = £2,700
Divided by number of pay periods = 12 pay periods
Equals taxable value to payroll per pay period (£2,700 ÷ 12) = £225
During the tax year, a change in circumstance may result in the expected cash equivalent at the start of the year to change from the actual cash equivalent at the end of the year, causing a difference in the tax liability on the benefit.
The same employer who had been renting living accommodation for £3,000 a year also rented another living accommodation for £3,600 a year from 1 August 2020. The same employee relocated to this new accommodation from 5 October 2023 at a rent of £480 a year. Both parties agreed that the employee will continue to occupy the new accommodation for at least the duration of the upcoming tax year.
This means that the tax liability arising accommodation 1 would be different to what was expected at the start of the tax year, as this benefit was not used for 12 months as expected.
Accommodation 1 – initial 7 months of 2027 to 2028 tax year
Expected cash equivalent for 12 months (£3,000 – £300 = £2,700)
Apportioned for 7 months
Equals actual cash equivalent £2,700 × 7 ÷ 12 = £1,575
At the end of the tax year, the actual cash equivalent is recalculated and reconciled with the expected cash equivalent. The difference is the amount that has not yet been accounted for by the payroll. The revised taxable value of the benefit has now increased from £2,700 to £2,875.
The revised amount is reported to HMRC and HMRC will collect or repay any tax due through the End of Year Reconciliation (P800) or Simple Assessment process, or through Self Assessment if the employee is registered for Self Assessment.
Accommodation 2 – final 5 months of 2027 to 2028 tax year
Rent paid by employer for 5 months (£3,600 × 5 ÷ 12 = £1,500)
Less rent paid by employee for 5 months (£480 × 5 ÷ 12 = £200)
Equals actual cash equivalent (£1,500 – £200 = £1,300)
Accommodation 1 and accommodation 2 combined – whole 2027 to 2028 tax year
Cash equivalent for accommodation 1 = £1,575
Add cash equivalent for accommodation 2 = £1,300
Equals total revised cash equivalent (£1,575 + £1,300) = £2,875
Less taxable value accounted for by payroll = £2,700
Equals additional outstanding taxable value to be accounted for at the end of the year (£2,875 – £2,700) = £175
During the tax year, the employer can also account for a change in circumstance by revaluing the benefit in-year. The cash equivalent already payrolled would be taken into consideration and the remaining taxable value to be payrolled can be revised going forward.
The taxable value to be payrolled has increased from £225 in the first 7 months of the tax year to now £260 in the final 5 months of the tax year. The revised taxable value of the benefit has now increased from £2,700 to £2,875.
Accommodation 2 – final 5 months of 2027 to 2028 tax year
Rent to be paid by employer for 5 months (£3,600 × 5 ÷ 12) = £1,500
Less rent to be paid by employee for 5 months (£480 × 5 ÷ 12) = £200
Equals expected cash equivalent (£1,500 – £200) = £1,300
Divided by number of pay periods = 5
Equals taxable value to payroll per pay period (£1,300 ÷ 5) = £260
Accommodation 1 and accommodation 2 combined – whole 2027 to 2028 tax year
Cash equivalent for accommodation 1 = £1,575
Add cash equivalent for accommodation 2 = £1,300
Equals total taxable value (£1,575 + £1,300) = £2,875
Less taxable value accounted for by payroll = £1,575
Equals additional outstanding taxable value to be accounted for during the year (£2,875 – £1,575) = £1,300
Divided by number of pay periods = 5
Equals taxable value to payroll per pay period (£1,300 ÷ 5) = £260
| Month | Taxable amount to be accounted for by payroll |
|---|---|
| 1 | £225 |
| 2 | £225 |
| 3 | £225 |
| 4 | £225 |
| 5 | £225 |
| 6 | £225 |
| 7 | £225 |
| 8 | £260 |
| 9 | £260 |
| 10 | £260 |
| 11 | £260 |
| 12 | £260 |
Currently, the cash equivalent of an employer-provided living accommodation benefit is calculated retrospectively at the end of the tax year using actual obtained figures.
On 1 April 2000 an employer acquired living accommodation for £65,000 that an employee occupied from that date at a rent of £300 a year. The gross rating value for the property is £900. No improvements were made to the property before 6 April 2003.
The calculation of the cash equivalent of the benefit for 2027 to 2028 is:
Gross rating value = £1,000
Minus (b) employee rent (£1,000 – £1,250) = –£250
Left over rent from standard value = £250
Standard reporting value (more than (a)) = £0
Cost of providing accommodation = £175,000
Minus £75,000 = £100,000
Multiplied by interest rate (£100,000 × 4%) = £4,000
Minus left over rent from standard value (£4,000 – £250) = £3,750
Total value to report = £3,750
The standard reportable value is £0, because the rent is more than the annual rating value. This means there is no additional value to add to the Total value to report.
Under mandatory payrolling, reasonable estimates are required to input into the calculation at the start of the tax year to ascertain the expected cash equivalent of the benefit.
The scenario is the same, but it is now the start of the tax year instead of the end. The employer and employee have agreed the employee will continue to occupy the accommodation for the duration of the upcoming tax year – the same living arrangements and financial arrangements are expected to continue.
At the start of the tax year, the expected cash equivalent is estimated as follows:
Gross rating value = £1,000
Minus employee rent (£1,000 – £1,250) = –£250
Left over rent from standard value = £250
Standard reporting value = £0
Cost of providing accommodation = £175,000
Minus £75,000
Multiplied by interest rate (£100,000 × 4%) = £4,000
Minus left over rent from standard value (£4,000 – £250) = £3,750
Total value to report (cash equivalent) = £3,750
Once the estimated tax liability of an employer-provided living accommodation benefit is established, this could then be spread across the employee’s pay periods so that tax can be collected by the payroll.
Continuing on from this scenario, in the time that the employee has been living at this accommodation, they have always been paid monthly. This is expected to remain the case in the upcoming tax year.
During the tax year, the expected cash equivalent can be used for payrolling.
Expected cash equivalent = £3,750
Divided by number of pay periods = 12
Equals taxable value to payroll per pay period (£3,750 ÷ 12) = £312.50
During the tax year, a change in circumstance may result in the expected cash equivalent at the start of the year to deviate from the actual cash equivalent at the end of the year, causing a difference in the tax liability on the benefit.
The same employer who had acquired living accommodation for £175,000 that an employee occupied from that date at a rent of £1,250 a year acquired another living accommodation for £200,000 from 1 August 2000. The same employee relocated to this new accommodation from 1 October 2020 at a rent of £1,500 a year. Both parties agreed that the employee will continue to occupy the new accommodation for at least the duration of the upcoming tax year.
This means that the tax liability arising accommodation 1 would be different to what was expected at the start of the tax year, as this benefit was not used for 12 months as expected.
Accommodation 1 – initial 6 months of the tax year
Expected cash equivalent for 12 months = £3,750
Apportioned for 6 months
Equals actual cash equivalent (£3,750 × 6 ÷ 12) = £1,875
At the end of the tax year, the actual cash equivalent is recalculated and reconciled with the expected cash equivalent. The difference is the cash equivalent that has not yet been accounted for by the payroll. The first property had a cash equivalent of £3,750, the second property has a cash equivalent of £4,600. The revised taxable value of the benefit has now increased from £3,750 to £4,175.
The revised amount is reported to HMRC and HMRC will collect or repay any tax due through the End of Year Reconciliation (P800) or Simple Assessment process, or through Self Assessment if the employee is registered for Self Assessment.
Gross rating value = £1,100
Minus (b) employee rent (£1,100 – £1,500) = –£400
Left over rent from standard value = £400
Standard reporting value (more than (a)) = £0
Cost of providing accommodation = £200,000
Minus £75,000 = £125,000
Multiplied by interest rate (£125,000 × 4%) = £5,000
Minus left over rent from standard value (£5,000 – £400) = £4,600
Total value to report (cash equivalent) = £4,600
The standard reportable value is £0, because the rent is more than the annual rating value. This means there is no additional value to add to the total value to report.
Accommodation 2 – final 6 months of the tax year
Expected cash equivalent for 12 months = £4,600
Apportioned for 6 months
Equals actual cash equivalent (£4,600 × 6 ÷ 12) = £2,300
Accommodation 1 and accommodation 2 combined – whole tax year
Cash equivalent for accommodation 1 = £1,875
Add cash equivalent for accommodation 2 = £2,300
Equals total revised cash equivalent (£1,875 + £2,300) = £4,175
Less taxable value accounted for by payroll = £3,750
Equals additional outstanding taxable value to be accounted for at the end of the year (£4,175 – £3,750) = £425
During the tax year, the employer can also account for a change in circumstance by revaluing the benefit in-year. The tax already paid through the payroll would be taken into consideration and the remaining taxable value to be payrolled can be revised going forward. So, if a change to the cash equivalent occurs in year, the employer must work out the revised taxable amount (the cash equivalent or relevant amount) to payroll for the remaining pay periods for that tax year. Employers will need to identify what has been payrolled so far for and deduct this from the revised taxable amount. The balance should be divided equally and added to the employee’s earnings across the rest of the tax year.
In this case, the taxable value to be payrolled has increased from £1,875 in the first 6 months of the tax year to now £2,300 in the final 6 months of the tax year. The revised taxable value of the benefit has now increased from £3,750 to £4,175.
Accommodation 2 – final 6 months of the tax year
Expected cash equivalent for 12 months = £4,600
Apportioned for 6 months
Equals expected cash equivalent (£4,600 × 6 ÷ 12) = £2,300
Divided by number of payments = 6
Equals taxable value to payroll per pay period (£2,300 ÷ 6) = £383.33
Accommodation 1 and accommodation 2 combined – whole tax year
Cash equivalent for accommodation 1 = £1,875
Add cash equivalent for accommodation 2 = £2,300
Equals total revised cash equivalent (£,1875 + £2,300) = £4,175
Less taxable value accounted for by payroll = £1,875
Equals additional outstanding taxable value to be accounted for at the end of the year (£4,175 – £1,875) = £2,300
Divided by number of payment periods = 6
Equals taxable value to payroll per pay period (£2,300 ÷ 6) = £383.33
| Month | Taxable amount to be accounted for by payroll |
|---|---|
| 1 | £312.50 |
| 2 | £312.50 |
| 3 | £312.50 |
| 4 | £312.50 |
| 5 | £312.50 |
| 6 | £312.50 |
| 7 | £383.33 |
| 8 | £383.33 |
| 9 | £383.33 |
| 10 | £383.33 |
| 11 | £383.33 |
| 12 | £383.33 |
Currently, the cash equivalent of an employer-provided living accommodation benefit is calculated retrospectively at the end of the tax year using actual obtained figures.
A house that had been owned by the employer since 1972 was first occupied by a particular employee on 6 April 1998 when the market value of the employer’s interest was £130,000. It cost the employer £60,000 in 1972 and an extension was built in 1981 at a cost of £18,000. In 2002 to 2003 the employee paid rent of £1,000 per annum for it and for that year the official rate of interest was 5% and the gross rating value £800.
The calculation of the cash equivalent of the benefit for the year is:
Gross rating value = £800
Minus employee rent (£800 – £1,000) = –£200
Left over rent from standard value = £200
Standard reporting value = £0
Cost of providing accommodation = £130,000
Minus £75,000 = £55,000
Multiplied by interest rate (£55,000 × 5%) = £2,750
Minus left over rent from standard value (£2,750 – £200) = £2,550
Total value to report = £2,550
The standard reportable value is £0, because the rent is more than the annual rating value. This means there is no additional value to add to the total value to report.
Note that the cost of providing the accommodation is its market value as at 6 April 1998. This is because the:
- total cost of the property at 6 April 1998 (including the extension) exceeded £75,000
- employee first occupied it after 30 March 1983
- employer had owned it for at least 6 years by 6 April 1998, the date of the employee’s first occupation of it
The improvements costing £18,000 are not included in the calculation of the chargeable benefit as they were incurred before the employee occupied the property.
The proposed solution would involve agreement between the employer and employee to provide reasonable estimates to input into the calculation at the start of the tax year to ascertain the expected cash equivalent of the benefit.
The scenario is the same, but it is now the start of the tax year instead of the end. The employer and employee have agreed the employee will continue to occupy the accommodation for the duration of the upcoming tax year – the same living arrangements and financial arrangements are expected to continue.
At the start of the tax year, the expected cash equivalent is estimated as follows:
Gross rating value = £800
Minus employee rent (£800 – £1,000) = –£200
Left over rent from standard value = £200
Standard reporting value = £0
Cost of providing accommodation = £130,000
Minus £75,000 = £55,000
Multiplied by interest rate (£55,000 × 5%) = £2,750
Minus left over rent from standard value (£2,750 – £200) = £2,550
Total value to report = £2,550
Once the estimated tax liability of an employer-provided living accommodation benefit is established, this could then be spread across the employee’s pay periods so that tax can be collected by the payroll.
Continuing on from this scenario, in the time that the employee has been living at this accommodation, they have always been paid monthly. This is expected to remain the case in the upcoming tax year.
During the tax year, the expected cash equivalent can be used to enable payrolling.
Expected cash equivalent = £2,550
Divided by number of pay periods = 12
Equals taxable value to payroll per pay period (£2,550 ÷ 12) = £212.50
During the tax year, a change in circumstance may result in the expected cash equivalent at the start of the year to deviate from the actual cash equivalent at the end of the year, causing a difference in the tax liability on the benefit.
The same employer who had acquired living accommodation for £130,000 that an employee occupied from that date at a rent of £1,000 a year acquired another living accommodation for £150,000 from 1 August 2000. The same employee relocated to this new accommodation from 1 October 2000 at a rent of £1,200 a year. Both parties agreed that the employee will continue to occupy the new accommodation for at least the duration of the upcoming tax year.
This means that the tax liability arising accommodation #1 would be different to what was expected at the start of the tax year, as this benefit was not used for 12 months as expected.
Accommodation 1 – initial 6 months of the tax year
Expected cash equivalent for 12 months = £2,550
Apportioned for 6 months
Equals actual cash equivalent (£2,550 × 6 ÷ 12) = £1,275
At the end of the tax year, the actual cash equivalent is recalculated and reconciled with the expected cash equivalent. The difference is the cash equivalent not yet been accounted for by the payroll. The first property had a cash equivalent of £2,550, the second property has a cash equivalent of £3,450. The revised taxable value of the benefit has now increased from £2,550 to £3,000.
The revised amount is reported to HMRC and HMRC will collect or repay any tax due through the End of Year Reconciliation (P800) or Simple Assessment process, or through Self Assessment if the employee is registered for Self Assessment.
Gross rating value = £900
Minus employee rent (£900 – £1,200) = –£300
Left over rent from standard value = £300
Standard reporting value = £0
Cost of providing accommodation = £150,000
Minus £75,000
Multiplied by interest rate (£75,000 × 5%) = £3,750
Minus left over rent from standard value (£3,750 – £300) = £3,450
Total value to report = £3,450
The standard reportable value is £0, because the rent is more than the annual rating value. This means there is no additional value to add to the total value to report.
Accommodation 2 – final 6 months of the tax year
Expected cash equivalent for 12 months = £3,450
Apportioned for 6 months
Equals actual cash equivalent (£3,450 × 6 ÷ 12) = £1,725
Accommodation 1 and accommodation 2 combined – whole tax year
Cash equivalent for accommodation 1 = £1,275
Add cash equivalent for accommodation 2 = £1,725
Equals total revised cash equivalent (£1,275 + £1,725) = £3,000
Less taxable value accounted for by payroll = £2,550
Equals additional outstanding taxable value to be accounted for at the end of the year (£3,000 – £2,500) = £450
During the tax year, the employer can also account for a change in circumstance by revaluing the benefit in-year. The tax already paid through the payroll would be taken into consideration and the remaining taxable value to be payrolled can be revised going forward.
The taxable value to be payrolled has increased from £1,275 in the first 6 months of the tax year to now £1,725 in the final 6 months of the tax year. The revised taxable value of the benefit has now increased from £2,550 to £3,000.
Accommodation 2 – final 6 months of the tax year
Expected cash equivalent for 12 months = £3,450
Apportioned for 6 months
Equals expected cash equivalent (£3,450 × 6 ÷ 12) = £1,725
Divided by number of pay periods = 6
Equals taxable value to payroll per pay period (£1,725 ÷ 6) = £287.50
Accommodation 1 and accommodation 2 combined – whole tax year
Cash equivalent for accommodation 1 = £1,275
Add cash equivalent for accommodation 2 = £1,725
Equals total revised cash equivalent (£1,275 + £1,725) = £3,000
Less taxable value accounted for by payroll = £2,550
Equals additional outstanding taxable value to be accounted for at the end of the year (£3000 – £1,275) = £1,725
Divided by number of pay periods = 6
Equals taxable value to payroll per pay period (£1,725 ÷ 6) = £287.50
| Month | Taxable amount to be accounted for by payroll |
|---|---|
| 1 | £212.50 |
| 2 | £212.50 |
| 3 | £212.50 |
| 4 | £212.50 |
| 5 | £212.50 |
| 6 | £212.50 |
| 7 | £287.50 |
| 8 | £287.50 |
| 9 | £287.50 |
| 10 | £287.50 |
| 11 | £287.50 |
| 12 | £287.50 |
Payrolling the cash equivalent and expected cash equivalent of a loan
Currently, the cash equivalent of an employment-related beneficial loan is calculated retrospectively at the end of the tax year using actual figures.
The following examples are on the basis that the employee’s tax code is operated on a cumulative basis.
Here are some examples that illustrate how employment related loans can be payrolled.
Example 1 – cash equivalent calculation of an employer related beneficial loan
On 1 July an employer lent £15,300 to an employee. The loan was in existence for 9 complete months of the tax year and the employee had no other loans with the employer. The employee was paid monthly.
Interest was charged monthly on the balance of the outstanding loan at an annual rate of 4% (APR), compounding monthly. Repayments consisting of £135 capital plus the monthly interest were deducted monthly from the employee’s salary, which was paid on the last day of each month. By the end of the tax year (as at 31 March), the outstanding balance was £14,085 and they had paid interest of £362.44. The official rate of interest (ORI) for the tax year was 6%.
At the end of the tax year, the actual cash equivalent is calculated as follows:
Balance at start of loan = £15,300
Actual balance of loan at end of tax year = £14,085
Actual average amount of loan (£15,300 + £14,085 ÷ 2) = £14,692.50
Multiplied by ORI (£14,692.50 × 6%) = £881.55
Apportioned for 9 months
Equals interest on loan at ORI (£881.55 × 9 ÷ 12) = £661.16
Less interest paid by employee = £362.44
Equals actual cash equivalent (£661.16 – £362.44) = £298.72
The proposed solution would involve agreement between the employer and employee to provide reasonable estimates to input into the calculation at the start of the tax year to ascertain the expected cash equivalent of the benefit.
On 1 July an employer lends £15,300 to an employee. The loan is expected to be in existence for 9 complete months of the tax year and the employee has no other loans with the employer. The employee is paid monthly.
Interest is to be charged monthly on the balance of the outstanding loan at an annual rate of 4% (APR), compounding monthly. It was agreed between the employer and employee at the start of the loan that repayments consisting of £135 capital plus the monthly interest would be deducted monthly from the employee’s salary, which is paid on the last day of each month. By the end of the tax year, the outstanding balance on the loan is expected to be £14,085 and the employee is expected to have paid interest of £362.44. The ORI for the tax year is 6%.
At the start of the tax year, the expected cash equivalent is estimated as follows:
Balance at start of loan = £15,300
Actual balance of loan at end of tax year = £14,085
Actual average amount of loan (£15,300 + £14,085 ÷ 2) = £14,692.50
Multiplied by ORI (£14,692.50 × 6%) = £881.55
Apportioned for 9 months
Equals interest on loan at ORI (£881.55 × 9 ÷ 12) = £661.16
Less interest paid by employee = £362.44
Equals actual cash equivalent (£661.16 – £362.44) = £298.72
Once the expected tax liability of an employment-related beneficial loan is established, this can be spread across the employee’s pay periods so that tax can be collected by the payroll.
Continuing on from this scenario, the loan is expected to remain in existence for 9 complete months of the tax year. The employee has always been paid monthly.
During the tax year, the expected cash equivalent can be used to enable payrolling.
Expected cash equivalent = £298.72
Divided by number of pay periods = 9
Equals taxable value to payroll per pay period (£298.72 ÷ 9) = £33.19
Example 2 – smaller than expected repayments
Throughout the tax year, actual cash equivalent by the end of the year may deviate from the expected cash equivalent at the start of the year, causing a difference in the tax liability on the benefit.
During the tax year, the same employee asked if lower amounts could be deducted from his salary so that he could repay less capital on the loan. The capital repayments were reduced to £90 per month, starting with the payment on 31 October. As a result, by the end of the tax year, the outstanding balance was £14,355 rather than £14,085. The interest repayments in the tax year were £364.28 rather than £362.44.
At the end of the year, the employer should reconcile the difference in cash equivalent between the initial expected or estimated and the actual obtained. The revised amount is reported to HMRC and HMRC will collect or repay any tax due through the End of Year Reconciliation (P800) or Simple Assessment process, or through Self Assessment if the employee is registered for Self Assessment.
At the end of the tax year, the actual cash equivalent is recalculated and reconciled with the expected cash equivalent. The difference is the outstanding taxable value that has not yet been accounted for by the payroll. The revised taxable value of the benefit has now increased from £298.72 to £302.96.
Balance at start of loan = £15,300
Actual balance of loan at end of tax year = £14,355
Actual average amount of loan (£15,300 + £14,355 ÷ 2) = £14,827.50
Multiplied by ORI (£14,827.50 × 6%) = £889.65
Apportioned for 9 months
Equals interest on loan at ORI (£889.65 × 9 ÷ 12) = £667.24
Less interest paid by employee = £364.28
Equals actual cash equivalent (£667.24 – £364.28) = £302.96
Less expected cash equivalent = £298.72
Equals additional outstanding taxable value to be accounted for at the end of the year (£302.96 – £298.72) = £4.24
Where there is a change in circumstances, the employer will need to recalculate the actual value of the benefit, the total taxable value that needed to be payrolled, factor in the amounts already payrolled in previous pay periods and amend the amounts that are to be payrolled for the remaining pay periods.
Continuing on from this scenario, the loan is expected to remain in existence for 9 complete months of the tax year. The employee has always been paid monthly.
As the employee decided, from 31 October, to repay the loan at a lower rate than was initially expected the employer can revalue the benefit in-year and amend the payroll figures by factoring in the amounts already payrolled.
Expected cash equivalent = £298.72
Taxable value payrolled based on expected cash equivalent (£298.72 ÷9) = £33.19
Actual cash equivalent = £302.96
Number of months already payrolled = 3
Total amount already payrolled (£33.19 × 3) = £99.57
Actual cash equivalent minus amount already payrolled (£302.96 – £99.57) = £203.39
Divided by number of remaining pay periods = 6
Equals new taxable value to payroll per remaining pay period = £33.90
This new taxable value can then be payrolled for the remaining 5 pay periods, arriving at the same cash equivalent as reconciling in month 12.
The employer can now input the revised monthly taxable value of £33.90 for the remaining 6 pay periods of the year to arrive at the revised total cash equivalent of £302.96.
| Month | Taxable amount to be accounted for by payroll |
|---|---|
| 1 | Not applicable |
| 2 | Not applicable |
| 3 | Not applicable |
| 4 | £33.19 |
| 5 | £33.19 |
| 6 | £33.19 |
| 7 | £33.90 |
| 8 | £33.90 |
| 9 | £33.90 |
| 10 | £33.90 |
| 11 | £33.90 |
| 12 | £33.90 |
Example 3 – larger than expected repayments
The employee may decide to repay some or all of the loan sooner than was initially estimated, which may lead to an overpayment of tax. During the tax year the employee decided to repay the loan in full by the end of the year. This means that at the end of the year the expected balance of the loan was £14,085, but the actual balance of the loan is £0.
The employee decides in month 5 to repay the loan in full by the end of the year. The first 4 repayments consist of £135 capital plus the monthly interest. The subsequent 5 repayments (from 30 November) consist of £2,952 capital plus the monthly interest. The expected balance of the loan at the end of the tax year was £14,085, it is now £0. The taxable value of the benefit has now decreased from £298.72 to £58.67.
Balance of loan at start of loan = £15,300
4 months repaid at £135 (4 × £135) = £540
5 months repaid at £2,952 (£2,952 × 5) = £14,760
Total amount of capital repaid = £15,300
Actual balance of loan at end of tax year (or when loan was discharged) (£15,300 – £15,300) = £0
Actual average amount of loan (£15,300 + £0 ÷ 2) = £7,650
Multiplied by ORI (£7,650 × 6%) = £459
Apportioned for 9 months
Equals interest on loan at ORI (£459 × 9 ÷ 12) = £344.25
Less interest paid by employee = £285.58
Equals actual cash equivalent (£344.25 – £285.58) = £58.67
Less expected cash equivalent = £298.72
Equals change in cash equivalent (£58.67 – £298.72) = –£240.05
Where there is a change in circumstances, the employer will need to recalculate the actual value of the benefit, the total taxable value that needed to be payrolled, factor in the amounts already payrolled in previous pay periods and amend the amounts that are to be payrolled for the remaining pay periods.
Continuing on from this scenario, the loan is expected to remain in existence for 9 complete months of the tax year. The employee has always been paid monthly. As the employee decided to repay the loan in full the employer can revalue the benefit in-year and amend the payroll figures by factoring in the amounts already payrolled.
Expected cash equivalent = £298.72
Taxable value payrolled based on expected cash equivalent (£298.72 ÷ 9) = £33.19
Actual cash equivalent = £58.67
Number of months already payrolled = 4
Total amount already payrolled (4 × £33.19) = £132.76
Actual cash equivalent minus amount already payrolled (£58.67 – £132.76) = –£74.09
| Month | Taxable amount to be accounted for by payroll |
|---|---|
| 1 | Not applicable |
| 2 | Not applicable |
| 3 | Not applicable |
| 4 | £33.19 |
| 5 | £33.19 |
| 6 | £33.19 |
| 7 | £33.90 |
| 8 | –£74.09 |
| 9 | £0 |
| 10 | £0 |
| 11 | £0 |
| 12 | £0 |
The employer will include the –£74.09 in the next FPS so that the tax is paid back to the employee as soon as possible. This example is on the basis that the employee’s tax code is operated on a cumulative basis.
Example 4 – an employer provided mortgage with a fixed rate
On 5 April, an employee has an outstanding mortgage balance with their employer of £100,000. The mortgage has a fixed interest rate equivalent to 1.5% (annual), compounding monthly. The loan is in existence for the duration of the tax year and there are no other loans with the employer.
The employee made repayments of a fixed amount of £800 each month to include interest. The outstanding balance at the end of the tax year is £91,833 and the employee has paid £1,434 in interest. The Official Rate of Interest (ORI) for the tax year was 2.25% (annual).
At the end of the tax year, the actual cash equivalent is calculated as follows:
Balance of loan at start of loan = £100,000
Balance of loan at end of tax year = £91,833
Actual average amount of loan (£100,000 + £91,833 ÷ 2) = £95,916.50
Interest on loan at ORI (£95, 916.50 × 2.25%) = £2,158.12
Less interest paid by employee = £1,434
Equals actual cash equivalent (£2,158.12 – £1,434) = £724.12
Under mandatory payrolling, reasonable estimates are required to input into the calculation at the start of the tax year to ascertain the expected cash equivalent of the benefit.
Where the loan has a fixed rate, the employer is able to do this reasonably accurately at the start of the tax year. The cash equivalent will only change throughout the tax year if an overpayment of capital is made, or if the ORI changes mid-year.
Once the expected tax liability of an employment-related beneficial loan is established, this can be spread across the employee’s pay periods so that tax can be collected by the payroll. This employee is paid monthly.
Example 5 – an employer provided mortgage with fixed rate and employee makes an overpayment
Throughout the tax year, the actual cash equivalent by the end of the year may deviate from the expected cash equivalent at the start of the year, causing a difference in the tax liability on the benefit.
During the tax year, the same employee made an overpayment of £5,000 on their mortgage in October. As a result, by the end of the tax year, the outstanding balance is £86,802.51 and the employee has paid £1,402.51 in interest.
Where there is a change in circumstances, the employer will need to recalculate the actual value of the benefit, the total taxable value that needed to be payrolled, factor in the amounts already payrolled in previous pay periods and amend the amounts that are to be payrolled for the remaining pay periods.
At the end of the year, the employer should reconcile the difference in the initial expected or estimated cash equivalent and the actual obtained. The revised amount is reported to HMRC and HMRC will collect or repay any tax due through the End of Year Reconciliation (P800) or Simple Assessment process, or through Self Assessment if the employee is registered for Self Assessment.
Balance of loan at start of loan = £100,000
Balance of loan at end of tax year = £86,802.51
Actual average amount of loan (£100,000 + £86,802.51 ÷ 2) = £93,401.25
Interest on loan at ORI (£93,401.25 × 2.25%) = £2,101.52
Less interest paid by employee = £1,402.51
Equals actual cash equivalent (£2, 101.52 – £1,402.51) = £699.02
Less expected cash equivalent = £724.12
Equals reconciliation of cash equivalent to be accounted for at the end of the tax year = –£25.10
Following on from this example, as the employee made an overpayment in October, the employer could recalculate the cash equivalent in year and amend the payroll figures in the remaining months.
Expected cash equivalent = £724.12
Taxable value payrolled based on expected cash equivalent (£724.12 ÷ 2) = £60.34
Actual cash equivalent = £699.02
Number of months already payrolled = 6
Total amount already payrolled (6 × £60.34) = £362.04
Actual cash equivalent minus amount already payrolled (£699.02 – £362.04) = £336.98
Divided by number of remaining pay periods = 6
Equals new taxable value to payroll per remaining pay period = £56.16
This new taxable value can then be payrolled for the remaining 6 pay periods, arriving at the same cash equivalent as reconciling in month 12.
The employer can now input the revised monthly taxable value of £56.16 for the remaining 6 pay periods of the year to arrive at the revised total cash equivalent of £699.02.
| Month | Taxable amount to be accounted for by payroll |
|---|---|
| 1 | £60.34 |
| 2 | £60.34 |
| 3 | £60.34 |
| 4 | £60.34 |
| 5 | £60.34 |
| 6 | £60.34 |
| 7 | £56.16 |
| 8 | £56.16 |
| 9 | £56.16 |
| 10 | £56.16 |
| 11 | £56.16 |
| 12 | £56.16 |
Example 6 – an employer provided mortgage with variable rate
On 5 April, an employee has an outstanding mortgage balance with their employer of £100,000. The mortgage has a variable interest rate, compounding monthly. The loan is in existence for the duration of the tax year and there are no other loans with the employer.
The annualised interest rate varies throughout the tax year:
- April – 1.75%
- May to July – 1.5%
- August – 1.25%
- September – 1%
- October – 1.2%
- November – 1.2%
- December – 1.5%
- January – 1.75%
- February – 2%
- March – 1%
The employee made repayments of £800 each month to include interest. The outstanding balance at the end of the tax year is £91766.79 and the employee has paid £1366.79 in interest. The Official Rate of Interest (ORI) for the tax year was 2.25%.
At the end of the tax year, the actual cash equivalent is calculated as follows:
Balance of loan at start of loan = £100,000
Balance of loan at end of tax year = £91,766.79
Actual average amount of loan (£100,000 + £91,766.79 ÷ 2) = £95,883.40
Interest on loan at ORI (£95,883.40 × 2.25%) = £2,157.38
Less interest paid by employee = £1,366.79
Equals actual cash equivalent (£2,157.38 – £1,366.79) = £790.59
Expected cash equivalent = £790.59
Divided by number of pay periods = 12
Equals taxable value to payroll per pay period (£790.59 ÷ 2) = £65.88
Under mandatory payrolling, reasonable estimates are required to input into the calculation at the start of the tax year to ascertain the expected cash equivalent of the benefit.
Where there is a variable interest rate, this will be difficult to estimate accurately. The employer can make reasonable estimates and reconcile the cash equivalent of the benefit at the end of the tax year, as shown in the first part of Example 2. They can also recalculate the cash equivalent in year and amend the payroll figures in the remaining months.
Following this example, the interest rate is 1.75% (annual) in April and the employer makes a reasonable estimate that the interest rate across the tax year will average around 1.75% (annual), meaning the employer estimates the outstanding balance at the end of the tax year to be £92,073.52 and the interest paid to be £1,673.52.
Balance of loan at start of loan = £100,000
Expected balance of loan at end of tax year = £92,073.52
Estimated average amount of loan (£100,000 + £92,073.52 ÷ 2) = £96,036.76
Interest on loan at ORI (£96,036.76 × 2.25%) = £2,160.83
Less expected interest paid by employee = £1,673.52
Equals expected cash equivalent (£2,160.83 – £1,673.52) = £487.31
Divided by number of pay periods = 12
Equals taxable value to payroll per pay period (£487.31 ÷ 2) = £40.61
In April, May and June pay periods, the employer payrolls £40.61 in respect of the mortgage.
The interest rate varies in May and June (1.5% annual). In July, the employer recalculates the cash equivalent on the basis that the interest rate will remain on average 1.5% (annual) for the remainder of the tax year, meaning the employer estimates the outstanding balance at the end of the tax year to be £91,854.50 and the interest paid to be £1,454.50.
Balance of loan at start of loan = £100,000
Balance of loan at end of tax year = £91,854.50
Average on loan at ORI amount of loan (£100,000 + £91,854.50 ÷ 2) = £95,927.25
Interest on loan at ORI (£95,927.25 × 2.25%) = £2,158.36
Less interest paid by employee = £1,454.50
Equals recalculated expected cash equivalent (£2,158.36 – £1,454.50) = £703.86
Recalculated cash equivalent (July) = £703.86
Number of months already payrolled = 3
Total amount already payrolled (3 x £40.61) = £121.83
Recalculated cash equivalent minus amount already payrolled (£703.86 – £121.83) = £582.03
Divided by number of remaining pay periods = 9
Equals new taxable value to payroll per remaining pay period = £64.67
In July to February, the employer payrolls £64.67 in respect of the mortgage.
In March, the employer makes a reconciliation in the final pay period. The outstanding balance at the end of the tax year is £91,766.79 and the interest paid is £1,366.79.
If the outstanding loan amount changes between March and April, then the employer can account for this using the end of year update process.
Balance of loan at start of loan = £100,000
Balance of loan at end of tax year = £91,766.79
Average amount of loan (£100,000 + £91,766.79 ÷ 2) = £95,883.40
Interest on loan at ORI (£95,883.40 × 2.25%) = £2,157.38
Less interest paid by employee = £1,366.79
Equals recalculated actual cash equivalent = (£2,157.38 – £1,366.79) = £790.59
Recalculated cash equivalent (March) = £790.59
Number of months already payrolled = 11
Total amount already payrolled (3 x £40.61) +(8 x £64.67) = £639.19
Recalculated cash equivalent minus amount already payrolled (£790.59 – £639.19) = £151.40
Divided by number of remaining pay periods = 1
Equals new taxable value to payroll in final pay period = £151.40
The employer payrolls £151.40 in the final pay period, following the recalculation.
The general rule is that employers will need to divide the cash equivalent of the BIKs and expenses they will be providing across the number of relevant pay periods for each employee. In some tax years, employees may have additional pay periods so the calculation must take into account that this will be the case (for example, where there are 53 pay periods in a tax year divide the cash equivalent by 53). The number of pay periods in a tax year will need to be calculated for quarterly, weekly, fortnightly and 4-weekly payrolls.
For annual payrolls, the full cash equivalent can be payrolled without dividing it down.
When payrolling BiKs for specific payroll intervals, follow the guidance for irregular pay periods.
To work out the taxable amount of the benefit that you payroll each payday, you need to know the number of times you will pay your employees during the tax year. The number of paydays is determined by the interval between each payday (the pay period).
Jonathan is provided with medical benefit where the cash equivalent for the year is £1,248.
There are 52 weeks in the tax year and so there are 52 pay days. The cash equivalent of the medical benefit BiK is divided by 52 and the value added to Jonathan’s taxable pay at each pay day.
Jonathan is paid weekly and there are 52 pay days in the tax year. The medical benefit cash equivalent is £1,248. The taxable amount of the BiK is £1,248 ÷ 52 = £24.
Add £24 to Jonathan’s taxable pay at each pay day.
Cathleen is provided with a company car where the cash equivalent for the year is £5,200.
There are 12 months in the tax year and therefore 12 pay days. The cash equivalent of the company car is divided by 12 and the value added to Cathleen’s taxable pay at each pay day.
Cathleen is paid monthly and there are 12 pay days. The company car cash equivalent is £5,200. The taxable value of the company car BiK is £5,200 ÷12 = £433.
Irregular pay periods are payments of employment income which have no set pattern. To work out the taxable amount of the benefit, divide the cash equivalent by the number of days in the tax year then multiply by the number of days to the pay period date from the start of the tax year.
Imran is paid on 31 May, which is 56 days into the tax year and is provided with gym membership with a cash equivalent of £2,000
£2,000 ÷ 365 × 56 days = £306.84 which will be added to his taxable pay in that period.
The next time his employer pays him, they will need to work out the period the benefit was provided from their last payday, rather than from the start of the tax year.