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What does Payrolling Benefits Mean?

Rachel Greenway
Last updated on February 28, 2023

Prior to April 2016, the only way to formally report company-provided benefits to HMRC, e.g. company-funded meals, medical insurance, service awards and gifts, was to submit P11Ds at the end of the tax year. 

Not only was this a fiddly and manual process but it was also extremely time-consuming.

However, through changes that came in almost five years ago, companies now have the option to voluntarily register to an initiative called ‘Payroll Benefits in Kind’ (PBiK) through HMRC’s online service.

This new arrangement has enabled companies to change how employees are taxed and the manner in which they report expenses and benefits to HMRC.

Important update - February 2023

Ahead of the 2023/24 tax year, which begins on the 6th of April 2023, HMRC has announced that informal payrolling benefits arrangements will end. Previously, HMRC permitted 'informal payrolling', which would allow businesses to payroll benefits without being registered. From the 6th of April, HMRC will no longer agree to this. Find out more about what this means for your business below.

What is payrolling benefits?

Payrolling benefits in kind is the process that allows an employee to pay tax each pay period through the salary they earn in the tax year that they received the benefit. 

Previously, companies would have needed to fill out all of the information on a P11D at the end of each tax year, meaning employees paid the tax in the following year. HMRC would then collect the tax on benefits by reducing the employee's personal allowance.

When was the deadline to sign up?

Companies will need to have signed up no later than the 5th of April 2023 to use PBIK for the 2023/24 tax year. The application could be made via their HMRC account.

Key Update

As mentioned earlier, while HMRC used to allow employers to informally payroll their benefits if they’d missed this deadline, this is no longer the case. Informal arrangements are no longer allowed, and businesses must register for this initiative as of the 2023/2024 tax year.

In addition to this, HMRC no longer allows businesses to submit P11D forms and mark benefits as ‘payrolled’ for the new tax year (2023/2024).

More information can be found in the government's latest Employer Bulletin here.

Why should you payroll benefits?

  • It removes the need for you to complete P11Ds on behalf of your employees. Not only does using PBIK save time but it also reduces the chances of making any manual errors, unlike P11Ds.

  • Employees pay the tax on the benefit during the tax year in which they receive it.

  • You can plan regarding which benefits you wish to process in this way.

  • The benefit's value is visible in the employees' taxable gross figure on their payslip.

Important payrolling benefits information

Companies that want to register for PBIK must do so before the start of the tax year. The registration is ongoing, meaning that there's no need to reapply each year. 

They will also be required to inform HMRC via their online service about which benefits they wish to payroll and if they would like to exclude any specific employees from the PBIK scheme. 

Companies will still need to submit a P11D(b) form to report and pay Class 1A National Insurance contributions (NICs) due on the benefits.

Should a company ever wish to deregister, they can use the same online service. 

However, it is worth noting that this must be completed before the start of the tax year and can't be done halfway through.

What you need to know before payrolling benefits in kind

  • You can only register before the start of the tax year. Consequently, any benefits that are decided on or after the deadline can't be administered in this way.

  • Benefits such as employer-provided living accommodation and beneficial loans cannot be processed as a PBIK.

  • Once you've successfully registered for payrolling benefits in kind, you must write to your employees to let them know what this means for them. At the end of each tax year, and before 1 June, you must write to your employees again to provide them with:

    • Details of the benefits you have payrolled

    • The cash equivalent of the benefit

    • Details of benefits you have not payrolled

    • Any benefits that have been payrolled for optional remuneration

What tax do employees pay on benefits? 

Let’s take a little detour and talk about tax on employee benefits. In the UK, your employees are expected to pay tax on some types of benefits. Don’t worry, though - you can make this easier on them by paying this on their behalf, deducting what they owe right from their paychecks through the Pay As You Earn System (or PAYE for short). 

The treatment of this can be complicated and involve National Insurance (NI) considerations your business will need to be clued up on. Most importantly, you’ll want to ensure that your payroll system is optimised to deal with employee benefits tax properly. 

Employees can expect to pay taxes on benefits like accommodation, loans and cars. The amount they’ll need to pay will depend on the kind of benefit and its value, which you’ll work out for them as their employer. 

Some benefits, such as childcare and canteen meals, are tax-free, but these are only a few exceptions. Most benefits will attract some level of tax. And you’ll pay both tax and National Insurance on any benefits paid in cash, which are treated as ‘earnings’.

Payroll your benefits with PayFit

Payrolling benefits can be a bit of a headache. But it doesn’t have to be. PayFit makes reporting on your benefits easy and straightforward. We’ve recently revamped this feature on our platform to be even more simple and time-efficient. In other words, all it takes is for a simple toggle to be activated and hey, presto, you’re able to payroll benefits! 

Simply add employee benefits to PayFit and they’ll be payrolled going forward.

Want to experience the future of payroll?

PayFit's disclaimer

The information contained in this document is purely informative. It is not a substitute for legal advice from a legal professional.

PayFit does not guarantee the accuracy or completeness of this information and therefore cannot be held liable for any damages arising from your reading or use of this information. Remember to check the date of the last update.

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