Payrolling: tax employees' benefits and expenses through your payroll
How to report expenses and benefits you provide to employees or directors.
Registration for payrolling benefits and expenses
If you’re intending to, or already payroll benefits and expenses you must register them with HM Revenue and Customs (HMRC) using the online payrolling employees taxable benefits and expenses service.
This allows you to payroll tax on benefits and expenses without having to submit a form P11D after the end of the tax year. You need to register before the start of the tax year.
If you’ve missed the registration deadline, you can’t payroll benefits for tax year 2016 to 2017. If you have a valid reason, HMRC may agree that you can informally payroll, but you must still complete form P11D at the end of the tax year. Mark each P11D ‘Payrolled’. This stops HMRC collecting tax that has already been deducted from your employees.
Deregistration from the online service
Your registration is continuous so you only need to tell HMRC if you decide to deregister. You can do this before the start of the tax year using the online service.
If the tax year has started when you change your mind, you must wait until the end of the tax year before you stop payrolling. You’ll still need to deduct tax each payday and report this deduction to HMRC.
Benefits you can payroll
You can payroll all benefits except:
- vouchers and credit tokens
- employer provided living accommodation
- interest free and low interest (beneficial) loans
You must still report these benefits on a P11D, even if you’re payrolling other benefits for the same employee(s).
If you choose to payroll company car benefits you must not submit a form P46(Car). But if the car benefit is not being payrolled, you do need to submit a P46(Car).
You must tell HMRC which benefits you want to payroll during the registration process. The tax codes for all employees receiving these benefits will be amended, unless you’ve excluded those employees who you don’t want to payroll benefits in the online service.
Telling your employees
Once you’ve registered to payroll benefits, you must provide your employees with a letter straight away explaining that you are payrolling and what it means for them. You must also provide your employees with the following before 1 June after the end of each tax year:
- details of the benefits that have been payrolled, for example car fuel
- the cash equivalent of each benefit that’s been payrolled
- separate details of any benefits you haven’t payrolled
You can include this information on your employees’ payslips or in a separate note or statement.
HMRC recommends that whatever you do, you make it clear to your employees:
- what benefits have been subject to PAYE tax
- how much of the value of each benefit you have collected and reported tax on
If your employees complete a Self Assessment tax return they’ll need these details so they can report the total amount of PAYE income and the benefits they received on their return, along with their pay.
New starters with benefits
If you have a new employee and you provide them with a benefit you must explain that the new benefit will be taxed through payroll.
Tell the employee that:
- their tax code will be amended to adjust any benefits from previous employments
- the new benefit won’t be included in their tax code
- any underpaid tax that they’re paying through their existing tax code will still be collected via the tax code
Class 1A National Insurance contributions (NICs)
You’ll still need to work out the Class 1A NICs on the cash equivalent and complete Form P11D(b). The Class 1A NICs liability applies whether you are payrolling the benefits or reporting them to HMRC on form P11D.
You must keep a record of cash equivalents for benefits you provide throughout the tax year so that you can accurately report and submit your P11D(b) by 6 July.
Find more information on how to submit a P11D (b) in CWG5:Class 1A National Insurance contributions on benefits in kind.
Example: employer wants to payroll the health insurance benefit to their employees.
They pay £600 per year, per employee for this.
Employer registers with the online service and selects medical benefit as the benefit they want to payroll.
Employer tells their employees that they’re going to payroll the benefit.
Their employees’ tax codes automatically changes to take out the adjustment for this benefit.
Employer works out the taxable amount of the benefit and adds this to the employees actual monthly pay. The annual cost - £600 divided by the number of paydays per year, (12) = £50 per monthly pay, and the employee pay tax on this amount.
Working out the cash equivalent
You work out the cash equivalent of a benefit for payrolling in the same way as you do for a benefit that you report on a form P11D.
If you’re not sure what the value of the benefit is at the start of the tax year, you can make an estimate of the cash equivalent of the benefit. You can then adjust it later in the year when you know the exact premium.
To work out the cash equivalent of the benefits you provide, you can use the following:
- HMRC’s online calculator, or your own payroll software for company cars and car fuel
- special cases for employees in the motor industry
- company vans and fuel
- other benefits
The cash equivalent must be included in:
- the P60 at the year-end as part of the ‘total taxable pay in year’
- any P45 in the ‘total taxable pay to date’ field
Pay periods used to payroll the taxable amount
To work out the taxable amount of the benefit that you payroll each pay day, you need to know the number of days you expect to pay your employees during the tax year. The number of paydays is determined by the interval between each pay day – the pay period. Most employees are paid weekly, calendar monthly or 4 weekly.
Example: Employee has a company car with a cash equivalent of £5,200.
Employee is paid weekly - 52 pay days. The taxable amount of the benefit is £5,200 ÷ 52 = £100. Employer then adds £100 to employee’s taxable pay at each payday.
Employee is paid monthly - 12 pay days. The taxable amount of the benefit is £5,200 ÷ by 12 = £433.33. Employer then adds £433.33 to employee’s taxable pay at each payday.
Employee is paid four weekly - 13 pay days. The taxable amount of the benefit is £5,200 ÷ by 13 = £400. Employer then adds £400 to employee’s taxable pay at each payday.
Irregular pay periods
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 365 then multiply by the number of days to the pay period date from the start of the tax year.
Example: employee provided with a car benefit with a cash equivalent £5,200 for the tax year.
The employee is paid on 31 May, which is 56 days into the tax year.
£5,200 ÷ 365 x 56 days = £797.80 value to be added to the taxable pay in that period.
The next time you pay your employee, calculate the period the benefit was provided from their last pay day, rather than from the start of the tax year.
How to deduct or repay tax
You add the taxable amount of the benefit to your employee’s pay to be able to deduct the correct amount of tax.
Example: employee earns £24,000 per year, is paid monthly and has a company car with a cash equivalent value of £5,200.
Before payrolling employee’s monthly taxable pay is £2,000 (£24,000 ÷ 12 = £2,000).
The taxable amount of the car benefit at each pay day is £433.33 (£5,200 ÷12 = £433.33).
Employee’s total taxable pay when payrolling is £2,433.33 (£2,000 + £433.33 = £2433.33).
Once the total pay and the taxable amount of the benefit is recorded on the payroll, PAYE tax should be calculated.
Employee pays towards the cost of a benefit
Some of your employees may choose to make a payment towards the cost of a benefit, also known as ‘making good’. When they do this the cash equivalent of the benefit is reduced.
If the full cost of the benefit is made good, there is no taxable benefit as the employee has paid for it.
These arrangements are often made for private use of car fuel where all the cost of the provision of the private fuel has to be made good to reduce the benefit.
Employee fails to make good a benefit
If the employee doesn’t make good by the final payday, you must:
- work out the amount of benefit still to be taxed
- then calculate the amount of tax to deduct through the employee’s final wages payment of the tax year
If you’re unable to deduct the full amount of tax from the final payment, follow the instructions in the employee’s tax exceeds 50% of their pay.
Making good car and van private fuel benefit
You may have an agreement with your employee that they will make good the actual cost of private fuel to avoid a fuel benefit tax charge on a company car or van.
You might not know how much fuel has been purchased by the end of the tax year because either:
- you’re waiting for the bill for the fuel to be sent from the supplier
- your employee may not have been in a position to calculate their private miles at 5 April
If so, you don’t need to take further action provided your employee makes good the cost of their car fuel used for private mileage before 1 June of the following tax year.
If your employee fails to make good all or part of the cost of their private mileage before the 1 June following the end of the tax year, you need to:
- work out the fuel benefit charge
- add the fuel benefit charge as a taxable amount of benefit to the next wages payment on or after 1 June
- calculate PAYE
If the benefit continues after the 1 June, you must:
- calculate car fuel or van fuel benefit for the current tax year
- include it as a taxable amount of benefit each payday
This is to prevent a similar occurrence at the end of the next tax year.
You may need to recalculate the cash equivalent
Employee’s tax exceeds 50% of their pay
Employers must not deduct more than 50% in tax from an employee’s pay. This is called the overriding limit and ensures that employees aren’t left with too little pay to cover their living costs.
In some circumstances a high value benefit or expense, combined with low pay, could mean that the employee takes home little or nothing. This might be where an employee is being paid Statutory Sick Pay.
You are allowed to stop payrolling benefits where deducting the tax for the benefit means that the tax payable will exceed 50% of the employee’s cash pay.
You have two options:
You can exclude the employee from payrolling using the online service. If you exclude them for the rest of the tax year, the benefit they receive will be reintroduced into their tax code. Your employee should check that the amended code includes the correct amount of benefit so that they are not overpaying or underpaying tax.
You’ll need to send a P11D after the end of the tax year for the excluded employee. The amount on P11D and any tax already paid through payrolling will be included in the employee’s tax calculation after the year end. If you want to recommence payrolling in the next tax year, you will have to wait until after you have sent your P11D, as it is a trigger for amending tax codes. To recommence payrolling you review the employee exclusion list and remove the employee.
You can keep the employee in payrolling and carry forward the taxable amount of the benefit into future pay periods in that tax year.
Example: Employee is paid £1,000 per month and their tax code is 1060L.
Employee has a car benefit which adds £4,000 to their taxable pay in September.
Employee has a taxable pay of £5,000 in September.
You use the tax tables to work out the tax due to deduct. Under tax code 1060L this is £1116.25.
You can only deduct up to £500 in September (50% of their salary £1,000).
The uncollected tax of £616.25 is carried forward to the next payday.
The total taxable pay to date in October Full Payment Submission (FPS) includes the full benefit.
In October up to £500 tax can be collected and the remaining tax outstanding on the benefit and on October’s salary will carry forward to November payday.
If there are insufficient pay periods to recover the uncollected tax, then once the final FPS is made, any underpaid tax will be included in an end of year tax calculation and sent to the employee by HMRC.