Payrolling Benefits-in-Kind: A Guide

Many employees receive benefits-in-kind (BiK) along with their salary and are often a deciding factor for accepting a job. While these benefits can be advantageous for employees and employers, some come with tax responsibilities, such as filing annual P11D forms, which can be complicated. However, employers can now also collect tax on some benefits through payroll, either instead of, or alongside, P11Ds, to make the process easier. In this guide, learn all you need to know about payrolling benefits-in-kind, and what you need to report to HMRC.

Contact us today if you’d like to inquire about our payroll management and PAYE services, or carry on reading to find out more.

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What are Benefits in Kind (BiK)?

Benefits-in-kind (BiK) refer to any perks that an employer offers to their employees or directors, either as a service reward or recruitment appeal, which aren’t included in their regular salary. It’s important to note that not all of these benefits are subject to tax and/or National Insurance, but those that are taxable must be accurately reported to HMRC, through payroll and/or P11D forms.

Taxable Benefit Examples

Frequent examples of taxable benefits include:

Company cars for private use,
Fuel for private use,
Medical or dental insurance,
Childcare vouchers,
Company shares,
And many more.

Non-taxable benefits still need to be declared through a P11D(b) form, and there are some cases where they can become taxable, e.g. staff entertainment without the right structure won’t be tax-exempt – read more on staff entertainment benefits-in-kind here.

P11D Forms to Report Benefits-in-Kind

One way to report taxes on benefits is through a P11D form. Employers use this form to report their employees’ benefits to HMRC at the end of the tax year. If a vehicle is provided for private use, employers also file a P46 car form. Under this approach, employees with benefits settle some taxes retrospectively, as the P11D-based tax isn’t paid in real-time but based on the prior year.

Within the P11D form, each employee’s tax code is included to calculate the owed tax. It’s the employee’s responsibility to verify this code, though it can sometimes be difficult to determine whether or not the correct code is being used – and incorrect codes may lead to unforeseen tax bills or refunds. Our payroll management service utilises BrightPay payroll software that routinely checks for tax code updates for employees – if you’d like to know more, please get in touch today.

Payrolling Benefits-in-Kind

Due to the confusion sometimes associated with P11D forms, many companies are now opting for a different government system, introduced in 2016, which integrates benefits-in-kind into their payroll. This system is entirely voluntary but is designed for increased simplicity, resulting in saved time and reduced errors.

If your payroll software is HMRC-approved and has integrated payrolling BiK capabilities, your company can transition to this tax filing approach. To make the shift, you will also need to enrol in HMRC’s online service for payrolling benefits and expenses prior to the start of the applicable tax year.

Companies can put all employee benefits through payroll, apart from credit cards/vouchers, living accommodations, and beneficial loans.

Declaring Tax on Benefits-in-Kind Through Payroll

Businesses using the payrolling BiK system are required to specify the benefits they intend to process through payroll for their staff during the registration phase. This enables HMRC to adjust the tax codes for the relevant employees to ensure accurate tax assessment.

Following successful registration, employers must communicate these changes to their employees. The alterations will impact their tax code and, consequently, their net income. Employees need to be informed about the benefits scheduled for payrolling, the corresponding cash value of these benefits, and details regarding benefits not included in the payrolling process.

What about Optional Remuneration Arrangements (OpRAs)?

Optional remuneration arrangements (OpRAs) occur when employees exchange part of their earnings for non-cash benefits through salary sacrifice. These arrangements concern how the benefits are funded, and remain uninfluenced by payrolling BiK. If a benefit falls under an OpRA, its taxable value for payroll tax must be calculated using OpRA rules.

Advantages of Payrolling Benefits-in-Kind

Although businesses have the option to either file P11Ds or incorporate benefits-in-kind into payroll, the reasoning behind the new scheme was to streamline processes and save time. As an employer, you’ll find the following advantages:

No need to file P11D and P46 forms with HMRC.
Employees will ask fewer tax-related questions due to simpler tax codes.
More accurate tax deductions through monthly payroll.
Less frequent changes in individuals’ tax codes.
Decreased volume of year-end forms to complete.

Disadvantages of Payrolling Benefits-in-Kind

There are, however, a few potential drawbacks to payrolling BiK:

The initial registration process can be complicated – our friendly team can help with this
During the first two years of payrolling BiK, employees could experience higher tax payments as a result of prior underpayments (however, this will normalise by the third year).
Employers are still required to submit a P11D(b) form, regardless of whether benefits have been taxed through P11D forms or through payroll.

How to Calculate Taxable Amounts of Benefits-in-Kind

A benefit’s taxable amount aligns with its cash value. This sum should then be divided by the employee’s annual number of paydays to ensure the accurate tax has been applied.

For instance, consider a company car valued at £10,400 annually. If an employee is paid on a weekly basis, this equates to £200 per payday, which should be included as taxable income on their payslip. Alternatively, for a monthly-paid employee, £866.66 should be incorporated into their monthly payslip.

Any such taxable benefits allocated to employees must be integrated into their actual monthly pay when sending payroll details to HMRC. To facilitate this process, your payroll software provider needs to support this feature, enabling precise tax calculation on the provided benefits.

Processing Benefits-in-Kind for New Starters

When onboarding a new employee who will receive a BiK from the start of their role, you must make them aware of the tax implications. They should be informed about the following:

Tax will be paid on the benefit in real time.
Any changes to their tax code won’t reflect benefits-in-kind unless they’re already paying back an underpaid period of tax.

What if Tax is More Than 50% of Pay?

Under the current tax regulations in the UK, employers are restricted from deducting more than 50% of tax from an employee’s salary. This limitation can pose challenges when dealing with BiK. In cases where adding a benefit to the payroll could lead to a tax deduction exceeding 50%, there are two available options:

Omit the employee’s benefit from the payroll and instead declare it using a P11D form: This action ensures that HMRC incorporates the benefit into the employee’s tax code.
Distribute the taxable value of the benefit across multiple pay periods: This approach is particularly beneficial if an employee experiences an unexpectedly low payment for a month, such as during a period of receiving statutory maternity pay.

What to Do if the Benefit Value Changes

Changes in benefits like gym memberships and car expenses are quite common throughout the year. When such changes occur, updating the process is straightforward. Follow the method below to calculate the new taxable amount, using the earlier example where the car benefit’s cash value increased to £11,000 in July:

January to June: £10,400 divided by 12 months equals £866.66. Since this value is for the first half of the year, the sum is £866.66 multiplied by 6, resulting in £5,200, which has already been taxed.
July to December: £11,000 divided by 12 months equals £916.67. For the second half of the year, the total is £916.67 multiplied by 6, equalling £5,500, which remains to be taxed.

Benefits-in-Kind Deadlines

Employers need to be aware of HMRC’s deadlines for submitting and paying tax for BiK, to avoid potential penalties and interest. The deadlines vary based on the method used to pay taxes on these benefits:

Payrolling benefits-in-kind deadline: Taxes on benefits are deducted on a monthly basis – after this approach is implemented, there are no subsequent deadlines to meet. N.B. Companies not yet using the payrolling system must meet a registration deadline. Registration must take place before the start of the tax year (5^th April) for which payrolling BiK is intended.
P11D submission deadline: Companies must submit P11D forms annually. The deadline is set for the 6th of July, following the end of the relevant tax year.
P11D(b) submission deadline: To ensure the complete payment of Class 1A National Insurance contributions, employers must submit a P11D(b) form for all benefits-in-kind, regardless of whether they are declared through payroll or a P11D. The annual deadline for submitting the P11D(b) form is before the 6th of July, following the end of the relevant tax year. For every month or part month your P11D(b) is late, you’ll get a penalty of £100 per 50 employees.

Need Advice on Payrolling Benefits-in-Kind?

At Mercian Accountants, our payroll experts help you manage your PAYE responsibilities with HMRC-approved software so you can focus on running your business. If you’d like professional advice on payrolling benefits-in-kind, to ensure accurate tax deductions for your employees, feel free to contact us to discuss your company’s needs. You can get in touch either through our online form, by calling 01743 562430, or by emailing hello@mercianaccountants.co.uk.