Payrolling Benefits: Your Essential Guide

Tired of managing the annual P11D process to report benefits?

Below, we’ll break down the difference between the traditional P11D process and collecting tax on benefits through payrolling.

Here’s everything you need to know about payrolling benefits in kind so you can make an informed decision on whether or not you want to make the switch.

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What are benefits in kind?

Benefits in kind are any non-monetary benefits that form part of an employee's overall rewards package.

When we say 'monetary benefits', we just mean things like salary, bonuses and commission.

Although benefits in kind are not paid in cash, they still hold a monetary value that will have a financial impact on your employees' overall compensation.

Some benefits in kind have a taxable value - and so employees are expected to pay tax on them.

Examples of taxable benefits:

• Private medical insurance
• Company car benefits
• Employee benefits platforms

However, other benefits in kind will be subject to a salary sacrifice scheme, which means employees will simply see a small reduction in pay based on the value of the benefit(s).

These include: 

• Cycle to work schemes
• Childcare vouchers

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How do you let HMRC know about benefits in kind? 

Once your employees have chosen their benefits, you'll need to let HMRC know that they should be expecting a bit more tax from these employees.

There are two ways of doing this:

• P11D forms
• Payrolling benefits

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What is a P11D?

A P11D is a form used to report details of benefits and other taxable perks that are provided to employees during a tax year in addition to their regular salaries.

P11Ds are submitted after the tax year has ended to declare accumulated benefits.

So when a P11D is submitted in July 2023, it is for benefits received 6th April 2022 - 5th April 2023. HMRC then amend employees tax codes for the current tax year to reflect the benefit in the previous tax year.

The basic purpose of the P11D form is to ensure that the right income tax is calculated and paid on any taxable benefits.

If you're using P11Ds to declare benefits in kind, you'll need to complete a form for each individual employee, detailing any benefits employee has received over the course of the year (this is why it's important to keep track of who receives which benefits).

The form itself is broken down into sections for different benefits and expenses... and the information you'll need to enter will vary depending on the benefits you're reporting.

For a more straightforward benefit like private medical insurance, for example, you just need to add its annual value to the relevant section on the form.

And for more complex benefits like a company car, you'll need to submit information like the model of the car, price of the car, mileage etc.

Note: not all need to be reported - paying back an employee's costs and trivial benefits (less than £50 and not related to performance) don't need to be added to a P11D. If you're still unsure how to categorise your benefits, we'd recommend speaking to a tax advisor for guidance. 

Here's what a P11D form looks like:

How to submit a P11D form

Identify reportable benefits: First, you'll need to pick out all of the benefits in kind you provide to your employees that are subject to tax.

Calculate the cash equivalent of your benefits: For each reportable benefit, calculate the "cash equivalent" value. This is the amount on which tax and National Insurance contributions (NICs) are due. HMRC provides specific rules and guidance on how to calculate the cash equivalent for different types of benefits.

Submit your P11D forms: You'll then need to submit a P11D form for each relevant employee and the P11D(b) form summarising all the benefits in kind provided by the employer. (We'll cover P11D(b)s later on). These forms should be submitted to HMRC by the deadline -usually on or before July 6th following the end of the tax year (April 5th).

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P11D deadlines you may need to remember

• P11D/P11D(b): due to HMRC by 6th July
• Payment for any Class 1A National Insurance: due to HMRC by 22nd July if paying electronically (19th July if sending a cheque).
• Late submission penalty: £100 per 50 employees for each month the submission is delayed.

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What is payrolling benefits?

The concept of payrolling benefits is a fairly new one...

Until a few years ago, submitting a P11D was the only way businesses could declare employee benefits.

The system of payrolling benefits was introduced back in 2016 to simplify the reporting and tax collection process for both employers and employees.

The idea behind payrolling benefits is a pretty simple one: you can now include the cash equivalent value of certain taxable benefits provided to employees in their regular payroll calculations.

By integrating the taxable benefits into your regular payroll process, you'll avoid the usual end-of-year P11D reporting - which should cut down on paperwork and manual admin.

So, instead of submitting P11Ds at the end of every tax year, benefits in kind are reported each pay period every time you run payroll and the tax on them is deducted through the Pay As You Earn (PAYE) system on a real-time basis, just like with regular salary or wages.

Once you're up and running with payrolled benefits, a full payment submission (FPS) will replace P11Ds.

A full payment submission will be sent to HMRC every time you pay your employees.

The FPS contains details of the payments made to your employees during a specific pay period, along with information about the tax and National Insurance contributions deducted from their earnings.

So instead of having a P11D form for each employee, an FPS acts as a summary of all benefits paid to all relevant employees.

As far as your employees are concerned, which process you choose to go with wil have a fairly minimal impact. 

They'll be required to pay exactly the same tax, it's just a matter of when it gets paid. 

• P11D: Since reporting is done at the end of the tax year, no additional tax paid on benefits in that tax year. Instead, there'll be an amendment to their tax code the following tax year.
• Payrolling: Tax paid in real-time in the year the benefit has been provided. Taxable pay is increased as they get the benefit.

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Benefits of using payrolled benefits

While there may be some minor drawbacks, payrolling benefits is generally a more easy, streamlined way of declaring benefits.

Less admin work: You'll no longer need to go through the manual process of completing and submitting P11D forms for employees who are part of the payrolling benefits scheme. Deductions will be made in real-time each pay cycle so you don't need to waste time filling out and sending off forms.

Real-time tax deduction: Having tax liabilities calculated and deducted in real-time will help ensure that the correct amount of income tax and National Insurance contributions is collected.

Better cash flow: Your employees won't have to wait until the end of the tax year to settle their tax liability on applicable benefits - it's deducted from their pay throughout the year.

Improved transparency: Your employees will be able to see the taxable benefits they receive and the tax deductions on their payslips.

Reduced risk of errors: A more automated payroll process will typically mean that tax calculations are accurate and HMRC-compliant.

Flexibility to make adjustments: If one o your employee's benefit entitlement changes during the tax year, payrolling benefits will allow you to make immediate tax adjustments in the subsequent payroll.

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Are there any disadvantages to payrolling benefits?

Although payrolling is undoubtedly a more straightforward means of declaring benefits, there may be some potential drawbacks.

If you switch from P11Ds to payrolling, benefits will be double taxed in the first year following the switch.

Why's this? Well, when payrolling benefits, employees are taxed in real-time (in the current tax year)...

And so if your employees had benefits in the previous tax year and the current tax year, they will have to pay tax twice - once in real-time for the payrolled benefits, and again retrospectively for the previous tax year.

This is why some employers may choose to stick with P11Ds - so there is no tax burden on employees.

Although it's worth noting that this double tax will only be a one-off cost that only affects the year following the switch.

Another pitfall of the payrolling method is that not all benefits can actually be payrolled. 

Certain benefits, such as living accommodation and beneficial loans, still need to be reported through the P11D process.

Whilst this is fairly unlikely, if these benefits make up a significant portion of your rewards package, it may be worth sticking with P11Ds. 

How to payroll benefits: the basics

Register with HMRC: Before you can start payrolling benefits in kind, you must register your company with HMRC for the payrolling benefits service. You can do this via their website. This will need to be done before the start of the tax year you want to report on.

Identify reportable benefits: Next, you'll need to determine which of your benefits are eligible for payrolling. Some of the most common ones include company cars, private medical insurance and gym memberships.

Calculate cash equivalent: Similarly to the P11D process, you'll need to calculate how much cash your benefits are worth.

Add cash equivalent to your payroll: Once you know the cash equivalent of your benefits, you simply add this to your employees' taxable pay for each pay period. This can be done through your regular payroll process.

Deduct tax and NICs: The income tax and National Insurance contributions owed on your payrolled benefits should be deducted through the PAYE system - you'll want to ensure that the correct tax codes and calculations are applied.

Update payslips: You'll need to make sure payslips show the taxable benefits your employees  have received and the corresponding tax deductions. Although those part of the payrolling scheme won't receive a P11D form for the benefits included in their pay (seeing as the tax has already been accounted for through their regular pay), you should still encourage them to review their payslips to ensure the correct tax deductions are being made.  

Submit PAYE information: As part of your regular payroll process, you're required to submit the necessary PAYE information to HMRC on or before each payday.

Submit your P11D(b) form: Although you don't need to complete P11D forms for employees who are part of the payrolling benefits in kind scheme, you'll still need to submit a P11D(b) form summarising the total Class 1A NICs due on all the benefits you've provided - which we'll explain below👇

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What is a P11D(b)? Are they still needed when payrolling benefits?

The short answer here is yes - you do still need to submit a P11D(b) even if you payroll your benefits.

This is because as well as paying tax on benefits, some benefits may also raise National Insurance contributions (Class 1A NI).

A P11D(b) is a form that's used to report the total amount of Class 1A National Insurance contributions (NICs) due on all the taxable benefits during the tax year.

The P11D(b) form is separate from the individual P11D forms that you'd use to report specific details of expenses and benefits provided to each employee.

While the P11D form is used to report the cash equivalent value of taxable benefits for each individual employee, the P11D(b) form is a summary report that combines all of the Class 1A NICs due.

So, even if you're payrolling benefits, you should still keep a record of the benefits you give throughout the tax year so that you can submit your P11D(b).

This must be done by 6 July after the end of the tax year.

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Payrolling benefits in kind using Pento: How it works

Pento is a HMRC-recognised payroll solution that was purpose-built to make payroll management error and stress-free - combining automation with expert support.

Using payroll software like Pento will allow you to automatically include the cash equivalent value of taxable benefits in your employees' regular pay.

If you payroll your benefits:

• Pento will calculate the cash equivalent value of your benefits
• Our automated payroll solution will deduct the appropriate income tax and NICs on any payrolled benefits in kind directly from employees' pay in real-time.
• Employees will receive payslips that show the taxable benefits they have received and the corresponding tax deductions.
• Pento generates reports, including payroll reports and summaries of payrolled benefits.

Or if you use P11Ds:

If you report benefits via P11D with Pento, you can sit back and relax as it's all taken care of...

• Final P11Ds will be sent to all employees via email or added in your
  HRIS (if you use HiBob or BambooHR)
• P11Ds and P11D(b)s have now been reported to HMRC
• Submit P11Ds to employees without a National Insurance number

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Payrolling benefits FAQ 

What does payrolling a benefit mean?

Payrolling benefits is the practice of including the cash equivalent of employees' taxable benefits in their regular payroll calculations instead of reporting them via a P11D at the end of each tax year.

Is payrolling benefits compulsory?

Payrolling benefits in kind is not compulsory. However, you do need to report on the benefits you provide to your employees. If you're not using the payrolling scheme, you'll need to submit P11Ds instead for each employee.

Do payrolled benefits go on P11D forms?

No - if you choose to payroll benefits in kind, the cash equivalent value of the taxable benefits is included in your employees' regular PAYE system. You will, however, still need to submit a P11D(b) forms to pay NICs on these benefits.

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Payrolling benefits in kind vs P11Ds: A quick summary 🎥

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