Payrolling of benefits – the beginning of the end for P11Ds?

From April 2016 it will be possible to account for employees’ benefits through the payroll rather than through the P11D system. HMRC has now published their draft guidelines on these changes. Unfortunately Class 1A NIC is still due on these benefits and will need to be returned separately.

To use the new system for the 2016/17 tax year the employer must register before 6 April 2016 so that HMRC can amend tax codes to remove any benefits on a timely basis. Going forward, the deadline for registering is likely to be even earlier.

One practical point, before registering make sure your software can deal with the payrolling of the benefits as not all can.

Unfortunately, at present, employers can not payroll benefits on vouchers and credit tokens; employer-provided living accommodation; and interest free and low interest (beneficial) loans; these excluded benefits must still be reported on forms P11D, even if other benefits for the same employee are being payrolled.

The employer has to write to the employees explaining what payrolling is, how it works, and what it means for them. New employees will also need to have the payrolling explained to them.

Before the first payroll run the employer has to calculate the cash equivalent value of the benefits to be payrolled less any employee contribution and add the appropriate proportion as a notional addition to gross pay. Care must be taken to ensure that the notional amount is added to taxable pay only and not also included in gross pay for national insurance purposes’

Before the 1st June following the end of the tax year the employer will need to have provided the employee with details of the benefits that have been payrolled.

The system is not simple and straightforward and I doubt there will be a rush by employers to register. It would, however, mean HMRC would not need to process large numbers of forms P11D. Though there is currently no suggestion from government that payrolling of benefits is to be made compulsory you do have to wonder if this is a long-term aim.