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How To Payroll Benefits In Kind

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From 2016/17 employers will have the option of dealing with the tax on most benefits in kind through the payroll in a process known as payrolling, rather than reporting them to HMRC at the end of the tax year on form P11D. Payrolling will be optional and employers will, if they so choose, be able to payroll most benefits in kind apart from accommodation, beneficial loans, credit tokens and vouchers. Employers who opt to payroll cars will face additional reporting requirements from April 2017.

The process
Under payrolling the cash equivalent of the benefit is treated like extra pay for payroll purposes. The payrolling process is set out in regulations which were published for consultation during the summer and is as follows.

Step 1
Before making the first normal regular payment to the employee (for example the employee’s regular wage or salary payment), referred to in the regulations as the `main relevant payment’, the employer must determine the cash equivalent of the specified benefit. The cash equivalent of the benefit is determined using the rules which are used to value benefits-in-kind for P11D purposes.

Step 2
Determine the number of main relevant payments made to the specified employee in the tax year.

Step 3
Divide the cash equivalent of the benefit (as per step 1) by the number of regular payments (as per step 2).
The resulting amount is the taxable amount of the benefit which is to be included in the payroll.

Step 4
Add the taxable amount of the benefit (as per step 3) to the employee’s first main regular payment.

Step 5
Deduct or repay tax on the amount included in the payroll (as per step 4) by reference to the employee’s tax code.

For each subsequent regular payment to the employee in the tax year, add the amount of the taxable benefit (as per step 3) and calculate the tax payable or repayable as per step 5.

Luke receives a salary of £24,000 a year and private medical insurance, the cash equivalent of which is £300. His employer opts to payroll the benefit.

Luke is paid monthly and his monthly salary is £2,000. The monthly equivalent of the benefit of his private medical insurance is £25. This is added to his cash pay each month and his PAYE tax is worked out on pay of £2,025 each month. His tax for the month is deducted from his cash pay of £2,000. Details are reported to HMRC under RTI.

Need to know: Most benefits in kind are liable to Class 1A rather than Class 1 NICs, so the cash equivalent is added to gross pay for PAYE purposes only (not NIC). The regulations have yet to be finalised so there may be changes before they come into force.

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