Payrolling Benefits in Kind: What You Need To Know - activpayroll

Payrolling of Benefits in Kind (BiK)

If you are intending to payroll benefits and expenses you must register them with HM Revenue and Customs (HMRC) using the online Payrolling Benefits in Kind (PBIK) service. If you use this service and payroll benefits and expenses you won’t have to report them on a P11D. Any unofficial payrolling of benefits schemes (private medical benefit etc.) can no longer be used, and approval for these schemes has been required from the 2016/2017 tax year. HMRC also no longer accept informal reports of employee benefits, sometimes referred to as lists.

If you use this service the only benefits you cannot tax through payroll are:

• living accommodation
• interest free and low interest (beneficial) loans

If you’ve previously been payrolling these benefits informally you can continue to do so but you must still report them on a P11D.

What do I have to do?

From the start of the 2016/17 tax year, you have been able to choose to account for the tax on the benefits in kind (BiKs) you provide to your employees through PAYE each payday. You do this by registering with HMRC using the Online Payrolling Benefits In Kind Service which is accessed through your Government Gateway account.

Please note that activpayroll cannot register you for payrolling of benefits, as there is no facility for a payroll/tax agent to do so. Each company must be registered for a Government Gateway account. We will, of course, be happy to assist with any queries that you may have.

Registering with HMRC allows you to payroll BiKs without having to submit form P11D after the end of the tax year.

You can choose to payroll company car BiKs you provide to your employees. This will mean you do not have to submit form P46 (Car) when you provide your employee with a new car. From 6th April 2018, it will be mandatory for you to report the company car information to HMRC via the payroll system.

You need to register before 6th April to start payrolling for the following tax year. This is because HMRC need to amend your employees’ tax codes in advance to remove any BiKs previously included. All subsequent years need to be registered before the start of the tax year.

If you make a mistake whilst registering, and fail to notice that mistake until after the start of the tax year, you will be able to make a late registration during the tax year by contacting us. For example, if you register an incorrect PAYE reference number and only realise after 6 April you will be able to register. You will have to send a P11D for that year.

If you are an employer who already payrolls BiKs but you miss the registration deadline, you won’t be authorised under this scheme to payroll BiKs for the following tax year. If HMRC agrees that you can informally payroll, you will have to complete form P11D at the end of the year.

The choice to payroll BiKs, will not affect the calculation for the Apprenticeship Levy.

Once you start payrolling BiKs, you must continue to do so for the full tax year unless any of the situations below applies.

1. Where there is insufficient income to cover the tax on the BiK – see ‘What to do if the employee’s tax exceeds 50% of their pay?
2. If you stop giving your employee the BiK – see ‘What do I do if the value of the BiK changes?’
3. You make a mistake in registering and realise after the start of the tax year (see above)

Your registration is continuous so you do not need to tell HMRC again that you want to payroll BiKs in the next tax year (or tax years). You can deregister from payrolling BiKs if you decide that you do not want to payroll BiKs. If you decide before the start of the tax year you can do this using the Online Payrolling Benefits in Kind Service.

However, if the tax year has started by the time you change your mind, you will have to wait until the end of the tax year before you stop payrolling. This means that you will be required to deduct tax each month and report this deduction to HMRC in your Real Time Information (RTI) submission. If you remove an employee from payrolling mid-year – other than in situations where you are allowed to do so – normal penalties for incorrect returns will apply.

What do I have to do for each employee when I start payrolling?

Once you register to payroll BiKs for an employee, you must take the following action;-

1. If you or your employees are new to payrolling BiKs you may want to provide them with a letter explaining what payrolling is, how it works and what it means for them. 2. Include the BiKs cash equivalent in their pay as a taxable amount 3. Provide your employees with the following information before 1 June after the end of the tax year.

• the name of all BiKs that have been payrolled in the tax year, for example car fuel
• the cash equivalent of each BiK that has been payrolled in the tax year. There is no prescribed format for these details. You may decide to include this information on your employees’ payslips or in a separate note or statement. We recommend that whatever you do, you make it clear to your employee what BiKs have been subject to PAYE and how much of the value of each BiK you have collected and reported tax on.

4. If your employee completes a Self-Assessment Tax Return they will need the details above so they can report the total amount of PAYE income and the BiKs they received.

5. You must still submit a P11D for any BiKs that you do not payroll. The ‘cash equivalent’ should be included in the P60 at the year-end as part of the ‘total taxable pay in year’. It should also be included in any P45 in the ‘total taxable pay to date’ field.

Which BiKs can I payroll?

You can payroll all BiKs apart from:

• employer provided living accommodation; and
• interest free and low interest (beneficial) loans.

You must still report these excluded BiKs on a P11D, even if you are payrolling other BiKs for the same employee(s). When you register with HMRC you will have to tell them which BiKs you want to payroll. The tax codes for all employees receiving these BiKs will be amended – unless you also tell HMRC which employees you do not want to payroll BiKs for.

How do I account for Class 1A NICs (National Insurance Contributions)?

As an employer providing BiKs you will still have to work out the Class 1A NICs on the cash equivalent. Form P11D (b) must still be completed and Class 1A National Insurance contributions (NICs) calculated for BiKs you provide.

The Class 1A NIC liability will be based on expenses and benefits provided either through payrolling or reported to HMRC on form P11D. You will need to ensure you keep a record of cash equivalents for BiKs you provide throughout the tax year so that you can accurately report and submit your P11D(b) by 6th July.

A very simple example

This is an example for Running Ltd who want to payroll the health insurance that it provides as a benefit to one of its employees, Andrew.

Andrew receives free health insurance. Running Ltd pay £600 per year for this.

1. Running Ltd registers with the Online Payrolling Benefits In Kind Service

2. They register Andrew as an employee who receives the health insurance BiK.

3. Andrew’s tax code automatically changes to take out the adjustment for this BiK.

4. Running Ltd tells Andrew that it is going to payroll this benefit and writes to him to tell him this

5. Running Ltd works out the amount of the BiK that it should include alongside Andrew’s actual pay. The annual cost (£600) divided by the number of paydays per year (12) = £50 per monthly pay.

6. Each month Running Ltd puts this £50 through its payroll and Andrew pays tax on this amount.

7. At the end of the year (before 1 June) Running Ltd tells Andrew how much taxable benefit he has had in the year and that it was for health insurance.

8. Running Ltd does not need to fill in a P11D for the health insurance BiK.

9. It works out the Class 1A NICS due. It also fills in a form P11Db to account for the Class 1A NICs that need to be paid by 6 July The Class 1A rate was 13.8% in 2016/17 which is applied to the annual cost. That is: 13.8% of £600 = £82.80

How do I know how much to payroll each time I pay my employees?

When you start payrolling a BiK you need to work out how much to payroll each time you pay your employees. You do so in the following way:

How do I work out the cash equivalent?

Benefits provided to employees – no cash alternative

Where you provide a benefit to your employees in addition to their salary, you work out the cash equivalent of a BiK for payrolling in the same way as you do for a BiK that you report on a form P11D.

If you are not sure what the value of the BiK is at the start of the tax year – for example you expect to renew your premium part way through the tax year – then you can make an estimate of the cash equivalent of the BiK.

If you require assistance in working out the cash equivalent of the BiKs you provide, please feel free to contact activpayroll.

Benefits provided under an Optional Remuneration Arrangement (OpRA)

From 6 April 2017, there have been a number of changes to the legislation which mean that where benefits are provided through arrangements under which the employee gives up the right to an amount of earnings in return for a benefit, any tax and National Insurance Contributions (NICs) advantages are largely withdrawn.

This change was made to reduce the advantages that use of these arrangements allowed. Under these arrangements, employees would pay less tax and NICs than they would have paid if they had been paid entirely in cash.

Benefits provided under ‘optional remuneration arrangements’ no longer benefit from the tax and NICs advantages that were previously available under salary sacrifice arrangements. This also includes situations where benefits in kind are offered with a cash allowance option and any flexible benefits packages with a cash option.

A benefit is considered to be provided under an OpRA if it is provided under an arrangement of either type A or type B, which HMRC define as:

• type A arrangements are arrangements under which the employee gives up the right, or the future right, to receive an amount of earnings (for example salary) which would be chargeable to tax under Section 62 ITEPA 2003 in return for the benefit
• type B arrangements are arrangements, other than type A arrangements under which the employee agrees to be provided with a benefit rather than an amount of earnings (for example the option of a cash allowance)

This means that where a benefit is chosen instead of an amount of cash pay, the taxable value of the benefit to be taxed is the greater of the amount of cash pay foregone (given up) and the taxable value of the benefit under the normal BIK rules. Where the two are the same, then apply the normal benefit valuation rules.

Transitional provisions apply for a limited period and certain benefits are excluded from this change.

For most benefits, arrangements entered into before 6 April 2017 will continue to be subject to the pre-2017 valuation rules until the earlier of:

• variation, renewal (including auto-renewal) or modification of the arrangement
• 6 April 2018

However, where the benefit is the provision of a car with emissions of more than 75g CO2/km, living accommodation and school fees the transitional rules apply for a longer period. The new rules will not apply to these types of benefits until 6 April 2021.

Further information about OpRA (including a number of examples) can be found on the GOV.UK website..

Once you have worked out the cash equivalent the next stage is to work out how times a year you pay your employees.

How do I work out pay periods & the taxable amount of the BiK?

To work out the taxable amount of the BiK that you have to payroll each pay day, you need to know the number of pay days on which you expect to pay your employees during the tax year. The number of pay days is determined by the interval between each pay day – the pay period. Employees are usually paid on a date agreed with their employer. Most employees are paid

• Weekly
• Calendar Monthly
• Four weekly

How do I work out the taxable amount of the BiK?

The following examples show how to work out the taxable amount of the BiK for three different pay periods that apply from the start of the tax year.

Patrick is provided with a company car where the cash equivalent of the BiK for the tax year is £5,200.

Weekly paid employees There are 52 weeks in the tax year and so there are 52 pay days. You divide the cash equivalent of the BiK by 52. You then add the value you arrive at to your employee’s taxable pay at each pay day.

Patrick is paid weekly. Company car cash equivalent: £5200 Pay days: 52 The taxable amount of the BiK is £5200 ÷ 52 = £100 Add £100 to Patrick’s taxable pay at each pay day.

Monthly paid employees There are 12 monthly pay days in the tax year. You divide the cash equivalent of the BiK by 12. You then add the value you arrive at to your employee’s taxable pay at each pay day.

Patrick is paid monthly. Company car cash equivalent: £5200 Pay days: 12 The taxable amount of the BiK is £5200 ÷ 12 = £433.33 Add £433.33 to Patrick’s taxable pay at each pay day.

Four weekly paid employees If you pay your employees every 4 weeks there are 13 pay days in the year. You divide the cash equivalent of the BiK by 13. You then add the value you arrive at to your employee’s taxable pay at each pay day.

Patrick is paid four weekly. Company car cash equivalent: £5200 Pay days: 13 The taxable amount of the BiK is £5200 ÷ 13 = £400 Add £400 to Patrick’s taxable pay at each pay day.

How do I deduct or repay tax?

You need to add the taxable amount of the BiK to your employee’s pay to be able to deduct the correct amount of tax.

Mustafa is paid monthly. He earns £24,000 per year and also has a company car which has a cash equivalent value of £5,200. There are 12 pay days in the year. Before payrolling, Mustafa’s monthly taxable pay is £2,000 The taxable amount of the car BiK at each pay day is £433.33 (£5,200 divided by 12 = £433.33) Mustafa’s total taxable pay when payrolling is £2,433.33.

Once the total pay and the taxable amount of the BiK is recorded on the payroll, PAYE tax should be calculated. This means that, if the taxable pay is greater than the ‘Free Pay’ for that pay period, tax is due.

Free Pay is based on the employee’s Personal Allowance for a tax year. The Personal Allowance for 2016/17 is £10,800. For a monthly paid employee this is divided equally across the 12 months which means the employee can earn £900.00 per month before the employer deducts tax.

• Mustafa has the standard Personal Allowance for 2016/17 of £10,800.
• His free pay monthly is £900 as he is paid monthly.
• Once the taxable amount of the BiK is added to his pay, the amount of taxable pay is £2,433.
• Deducting the free pay of £900 leaves £1 ,533.
• The tax rate for this payment is 20%, resulting in a deduction of £306.6 tax by the employer.
• The employer then pays this over to HMRC in the usual way.

For subsequent payments, continue to add the taxable amount of the BiK that you worked out to the pay for each pay period.

What if my employee leaves their job?

When your employee leaves their job, their BiK will usually stop when they do so, and only occasionally will it continue beyond their leaving date.

1. The BiK ends when your employee does: When your employee leaves their job you should check that the correct taxable amount of the BiK has all been accounted for in your RTI submissions. In the majority of cases there should be no further action to take.
2. The BiK continues after your employee leaves their job: You will need to recalculate the taxable amount of the BiK to include any balance with the final wage payment.

Mark has a BiK of an annual gym membership which ends at 31 December.

Mark gives his notice on 15 August. He leaves his company B Ltd on 30 September but he is allowed to keep his membership to the end of the calendar year.

In his August and September pay, B Ltd should include his BiK amount for September, October, November and December.

If you have an employee who is leaving, and you require assistance with the benefit calculations, activpayroll will be happy to assist with this.

What do I do if the value of the BiK changes? The value of a BiK may sometimes change part way through the tax year. This can be for a number of reasons: · Your employee may change their company car and their new car has a higher or lower cash equivalent · The annual premium (for example medical insurance) goes up or down · The BiK you offer to your employees’ ceases or changes.

If this happens then you need to recalculate the cash equivalent of the benefit. This means you recalculate the taxable amount of the BiK to add to your employees’ wage payments.

• Step 1 (a) First, work out the cash equivalent of the benefit provided up to the date of change by:
• Working out the annual cash equivalent
• Working out the taxable amount per pay day
• Multiplying this by the number of pay days up to the change
• Step 1 (b) next, work out the cash equivalent of the changed benefit to be provided from the date of change:
• Work out the annual cash equivalent
• Work out the taxable amount per pay day
• Multiply this by the number of pay days after the change
• Step 1 (c) Finally, add these two amounts together to get the revised cash equivalent for the tax year
• Step 2 Work out how much of the BiK has already been taxed to date:
• Count how many pay days there have been in the tax year to date
• Multiply that number by the original taxable amount of the BiK included for PAYE.
• Step 3 To work out the amount of BiK still to tax, subtract the answer at step 2 from step 1
• Step 4 Work out the number of pay days remaining for the tax year
• Step 5 Calculate the revised taxable amount for the benefit by dividing the amount at step 3 by the pay days at step 4
• Step 6 Add the revised taxable amount to each remaining wages payment for the rest of the tax year and calculate PAYE.

Where the revised taxable amount of the benefit is less than the original figure, the employee will pay less tax when the PAYE is calculated.

If, and only if, you have made your Final Full Payment submission for the tax year and the change of benefit occurs after that date, you may take account of the change and carry it forward to the next tax year.

Before the first wage payment in the next tax year is made you must:

1. Take steps 1 to 3 above to work out the amount of the BiK that has not been payrolled. 2. Add this amount to the first wages payment in the next tax year and operate PAYE on the total amount.

If the change means the cash equivalent of the benefit is less than the original figure, the employee will pay less tax when the PAYE is calculated.

Class 1A NICs is payable on the cash equivalent calculated at step 1. Class 1A NICs cannot be carried forward where a taxable amount is carried forward.

How do I change the value I am payrolling if I make a mistake?

If you make a mistake with the value you are payrolling, you will need to recalculate the amount to payroll. This might be because you become aware that:

• - the cash equivalent of the BiK that you have been using is incorrect or
• - that the number of pay days during the tax year has changed

What do I do if the employee’s tax exceeds 50% of their pay?

The PAYE regulations prevent employers from deducting more than 50% in tax from an employee’s pay. This is called the overriding limit and ensures that employees are not left with too little pay to cover their living costs.

In some circumstances the provision of a high value BiK/expense, combined with low pay, could mean that the employee takes home little or nothing. This might be where an employee is being paid Statutory Sick Pay.

Employers are allowed to stop payrolling BiKs where payment of the taxable amount of BiK means that the tax payable will exceed 50% of the employee’s cash pay. To protect employees and comply with the regulations you have the following options:

Option 1 You can exclude the employee from payrolling. Go into the Online Payrolling Benefit In Kind Service and exclude them. If you exclude them, the BiK that they receive will be reintroduced into their tax code.

Excluding them means that you will be required to send a P11D after the end of the tax year. If you wish to recommence payrolling in the next tax year, you will have to wait until after you have sent your P11D, as it is a trigger for amending tax codes.

To recommence payrolling you review the employee exclusion list to take the employee off it.

Option 2 Don’t exclude the employee in the Online Payrolling Benefit In Kind Service. Carry forward the taxable amount of BIK into future pay periods.

Clare is paid £1000 per month and her tax code is 1060L. She has a car BiK from her employer Dumplings Ltd which adds £4000 to her taxable pay in September. Clare has a taxable pay of £5000 in September. Dumpling Ltd use the tax tables to work out the tax due to deduct. Under her tax code this is £1116.25. Dumpling Ltd can only deduct up to £500 in September (50% of her salary £1000.) The uncollected tax (£616.25) carries forward to the next pay day. The total taxable pay to date in October FPS includes the full BiK. In October up to £500 tax can be collected and the remaining tax outstanding on the BiK and on October’s salary will carry forward to November pay day.

If there are insufficient pay periods to recover the uncollected tax, then once the Final Payment Submission is made under RTI, any underpaid tax will be included in an end of year tax calculation and sent to the employee.

HMRC recognise that employers ‘payroll’ to remove the burden of completing P11Ds. They expect that Option 2 will be the preferred option but recognise that in some circumstances some employers will prefer Option 1.

New Starters with BiKs

When a new member of staff starts in your business and you provide them with BiK you should:

• ensure that the new starter is fully aware that the BiK provided to them will be taxed through payroll and what this means:

1. the employee will pay tax in real-time,
2. they will not pay any more/less tax (unless they were previously over or underpaying tax)
3. their tax code will be amended (where relevant) and the BiKs will not be reflected in it – this is normal, the employer is now responsible for deducting the right amount of tax

• Contact HMRC to ask for any existing BiKs to be removed from their tax code
• Tell the employee that if they are already paying underpaid tax through their existing tax code that they will have to pay that tax alongside the payrolled amount, but that this will be collected via the tax code – this should reduce queries about lower than expected net pay