New payrolling benefits system – is it worth using?

Taxing benefits

The current system of taxing benefits in kind has always been contentious. It involves the dreaded annual routine of completingFormP11D which, as you’ll no doubt be aware, can be time consuming for you and your accountant. The idea behind payrollingbenefits is to largely do away with or simplify the P11D process.

How it works now and in future

HMRC collects tax on benefits by adjusting employees’ code numbers so that extra tax is collected each time they are paid. Payrolling a benefit will involve adding a notional amount to the employee’s taxable pay each time you pay them.

Example. Fred drives a company car. Under the P11D system, at the end of the tax year his employer works out the taxable benefit for it, let’s say it’s £3,600, enters that on a Form P11D and submits it to HMRC. Using payrolling the employer would instead work out the taxable benefit before he pays Fred and add a twelfth of it, i.e. £300, to his taxable salary each month.

The payroll adjustment

The additional pay, in our example £300, is added only for the purpose of working out tax. All payroll software, as far as we know, can already handle this type of pay adjustment. However, some software providers may add a facility to make payrollingof benefits even simpler. If not, they will at least send details of how to put it into practice in time for the start of payrolling on 6 April 2016.

Note. The payrolling benefits system is voluntary. You can choose to use it for all, some or none of your employees.

Pros and cons

HMRC says that the main advantage of payrolling is that it will simplify or even do away with the burdensome P11D process. Plus, where you payroll car benefits you’ll no longer need to notify HMRC (on Form P46 (Car) ) each time there’s a change of company car. However, in our view the most important point is that by using it the correct amount of tax will be paid on benefits. The P11D system almost invariably means too much or too little is paid.

Open for registration

HMRC opened registration for payrolling in October 2015 (see The next step ). It’s done wholly online and you’ll be guided through the process. If you want to usepayrolling for 2016/17 you must register by 5 April 2016.

Tip 1. If you register by 21 December 2015 HMRC says it will avoid tax codes for 2016/17 being issued that include benefits that are to be payrolled, so they won’t need to be amended.

Tip 2. You should advise employees well before payrolling starts on 6 April 2016, so they understand why there will be changes to their tax code. We’ve produced a sample letter which you can adapt for this purpose (see The next step ).


Reproduced with the permission of Indicator – FL Memo Limited. For subscription information call 01233 653500