Payrolling benefits: Your helpful guide and how to register
On 16 January 2024, the British government announced that they intend to mandate the payrolling of benefits-in-kind from April 2026. While the government will further consult on these changes before implementation, this is certainly a significant development.
Employers who are not already payrolling benefits will now need to familiarise themselves with the process, explore the actual benefits of payroll remuneration, and prepare for how these changes could impact their business finances.
In this article, we’ll take a closer look at what these changes are and how payroll managers could be impacted, as well as how businesses can register for payrolling benefits, ensuring that they’re ready to face the future with both hands on the wheel.
Introduction: Understanding payrolling benefits
This new payroll benefit framework will have huge implications for both employers and employees, promising streamlined processes, enhanced transparency, and improved financial compliance.
Historically, the administration of employee benefits, particularly those in kind, has been a clunky task for employers. From navigating complex tax regulations to managing disparate reporting systems, the traditional approach often entailed significant administrative overheads and logistical challenges.
Recognising the need for a more efficient and transparent solution, HMRC has announced the introduction of payrolling benefits in kind, marking a significant shift when it comes to employee benefits management.
What are payrolled benefits?
Payrolling benefits is the practice by which an employer will process the cash equivalent of a taxable benefit through the payroll system. This is a fairly uncommon process at the moment due to the additional work involved, with many businesses instead keeping things simple and straightforward.
At the time of writing, the most common benefit that employers provide is private medical insurance, allowing employees to seek healthcare from a private provider, as opposed to the NHS.
While this will be a common approach, payrolling benefits can also apply to other areas, such as company cars, dental, cover, and gym memberships. There are a few things that this can’t be applied to, such as living accommodation and loans, but for the most part, almost all employment benefits can be payrolled.
The advantages of payrolling benefits
There are many payrolling benefits for businesses and employees alike, and while it can take time to become accustomed to this new way of doing things, it often makes more sense.
Employers typically have fewer related administrative obligations when benefits are payrolled, potentially resulting in reduced professional fees or internal administrative work. Employers are not required to include payrolled benefits on a P11D. The P11D year-end benefit reporting and paying process can be administratively burdensome for employers, so it’s understandable why many would rather avoid it entirely.
Similarly, employers can benefit from added clarity and a more consistent tax bill. HMRC automatically identifies the employees with payrolled benefits and removes the benefits from their tax codes. Employees’ tax codes are therefore often simpler and pay-as-you-earn (PAYE) tax calculations more accurate. When the benefit is withdrawn, this is immediately reflected in the employee’s monthly salary and taxable pay.
Requirements for payrolling benefits
Navigating the legal and compliance requirements is vital when embarking on the payrolling benefits journey. Employers must carefully adhere to HMRC guidelines to ensure that they remain on the right side of the law. They should ensure that all benefits reported to HMRC are above board and allowed under the existing legislation.
Compliance standards encompass accurate valuation of benefits, deduction of applicable taxes, and maintenance of comprehensive records for auditing purposes. Staying abreast of regulatory updates, seeking professional counsel, and using an approved payroll software system can aid employers in meeting these requirements effectively.
How to register for payrolling benefits
Payrolling benefits in kind is currently an option available to all employers, and many employers have payrolled benefits for several years. This isn’t a new way of working, but with it becoming mandatory, an increasing number of businesses are now operating this way.
When an employer decides to payroll their benefits, they will need to register online with HMRC using their Government Gateway and access PAYE online services. On paper, the HMRC payrolling benefits process is fairly simple, but with government tools often being complicated, you should set aside some additional time to account for tools not working as intended.
To operate payrolling benefits, registration must be made before the start of the relevant tax year, which is at the start of April each year. You should leave yourself plenty of time to register for payrolling benefits as you will want to understand the finer details before setting it up ahead of it becoming mandatory.
Reporting and paying HMRC
In simple terms, the employer will calculate the amount of the taxable benefit provided and then divide that amount equally between the number of months in the tax year. The monthly amount will be treated as a notional payment, subject to tax only. You could draw a comparison to the Cycle to Work scheme, but there are some differences to keep in mind.
For example, if an employee is paid monthly and the employer intends to payroll a benefit with a value of £1,500, an amount of £125 (£1,500/12) is put through payroll each month and taxed accordingly.
Employers can decide which benefits to payroll and for which employee. Not all benefits have to be payrolled, but it’s worth speaking to a professional as it’s easy for this to become confusing, especially with the government requirement coming into play from 2026 onwards.
How can Moore Kingston Smith help?
At Moore Kingston Smith, we have a team of specialists who are experienced in helping employers meet their tax and NIC obligations regarding employment taxes. No matter your query, our team is ready and willing to help find a solution that works for you, taking into account your business’s unique circumstances.
If you would like to discuss any of the above, or are already payrolling benefits and would like independent confirmation that you are operating it correctly, please contact us so we can provide expert guidance and support.