Payrolling Benefits in Kind

Since 2016 employers have had the option of payrolling their employee benefits. But what does it involve and how can employers take part?

Where an employer provides taxable benefits in kind to its employees and it reports these benefits annually on form P11D, it can consider payrolling those benefits so that P11Ds no longer have to be completed.

Not all benefits have to be payrolled; the employer can choose.

The only benefits that cannot be payrolled and must continue to be reported on a P11D in the usual manner are:

• Living accommodation
• Interest-free or low interest loans subject to the beneficial loan interest charge.

(Please note that HMRC has announced that it will become mandatory for employers to report all employee benefits through payroll from 6 April 2026.)

Registration

By registering for payrolling an employer adds the cash equivalent of a benefit as a nominal adjustment to an employee’s taxable pay.

Once the value of the benefit is included in taxable pay, the tax for the employee is calculated, collected and paid on the benefit in real time throughout the tax year.

To register for payrolling an employer has to complete an application prior to the start of the tax year for which it is to apply. One registered, the employer remains registered for future years.

There are various steps to work through prior to registering.

• An employer needs to check with their software provider that its payroll software will allow for payrolling of benefits.
• If the software is suitable, registration can take place on HMRC’s online service
• The employer will need to select which groups of benefits to be payrolled

HMRC’s systems can automatically identify all staff with the relevant benefits to be payrolled and will remove those benefits from their tax code.

Telling employees

Once registered, an employer must inform affected employees that their tax codes will change, including:

• details of benefits payrolled
• the cash equivalent of each benefit payrolled
• details of benefits not payrolled

This could be provided with payslips or in a separate note.

What about end of year forms?

Where an employer chooses to payroll all benefits suppled to all staff, there is no need to prepare P11Ds. However, the employer will still need to prepare a P11D(b) to pay any employers Class 1A NICs on relevant benefits.

Where only some benefits are payrolled, then any benefits not payrolled will still have to be reported on forms P11D in the normal manner.

Informal Payrolling of Benefits

HMRC has confirmed that, from 6 April 2023, it will no longer be accepting any new informal payrolling benefit arrangements.

Previously, if you missed the deadline for registering to payroll benefits, you could apply to HMRC to informally payroll your employees’ benefits. This option will no longer be available from the start of the 2023/24 tax year.

Also, any employers who have an existing informal payrolling arrangement in place must look to formalise their agreement and register with HMRC as soon as possible should they wish to continue payrolling benefits for the 2023/24 tax year onwards.

If the employer had an informal arrangement in place for the 2022/23 tax year, they can continue to submit their 2022/23 P11Ds as normal (marked as ‘payrolled’) for this year’s filing only.

Next step

If you would like to know more information about Bishop Fleming Payroll Services by IRIS, please click here.