Mandatory payrolling benefits
In January 2024 the government announced its intention to simplify tax further by making payrolling benefits mandatory by April 2026. Their intention is to also have the Class 1A NIC processed and paid in real time.
History
The framework to voluntary payroll benefits was introduced in April 2016. At that time, all benefits, apart from vouchers (section C of the P11D), living accommodation (section D) and loans (section H), could be payrolled. To payroll benefits, the employer must first register with HMRC and this must be completed by the 5th April, before the start of the new tax year.
The cash equivalent value (CEV) still needs to be calculated for each benefit provided to an employee, but instead of managing this process at the end of the tax year, when we know exactly what benefits have been provided to each employee, we estimate the CEV in April. We base this on the information available at the time, and the annual CEV calculated is then divided by the number of pay frequencies in the tax year. So if you process a monthly payroll, the CEV would be divided by 12. That 1/12th amount is processed through the payroll as a taxable value only, assuming this is a Class 1A benefit. The Class 1A NIC is currently still paid by 22nd July after the tax year end.
In 2017, vouchers (section C of the P11D) were permitted to be payrolled, and all the required company car details were held in the payroll software to allow the data to be submitted to HMRC via RTI.
In 2018, the company car details became mandatory fields if you had registered to payroll your company car benefits.
Considerations
The payroll software
Does your payroll software have the ability to submit payrolled benefit data to HMRC?
If it can, how does the data look on the payslip? What does the employee see? Can the payslip show a year-to-date amount for each benefit provided? If not, a statement will need to be provided to each employee by 1st June following the tax year end, detailing the benefits they have received and the taxable amounts.
Operations
How will payroll be informed of any new benefits or changes in benefits for each employee? Who will be responsible for calculating the CEV? Will this need approval before it is processed (as employees will see these details on their payslip)? What about annual renewal charges, this is common with PMI, how will this be managed mid-tax year?
Communication
Informing employees, their benefits will no longer be P11D’d but instead will be processed through the payroll. If employees make good, how will the details of the overall calculation be provided to them? What if employees are in receipt of Universal Credit, will payrolling impact their assessments? Do they need to tell HMRC if they have been provided with a new benefit in kind?
Pros and Cons
The February 2024 Employer Bulletin described payrolling benefits as the “quicker and easier” option, and in their view, it is. However, it is far from quicker and easier, especially if you have multiple benefits provided to employees, multiple changes throughout the tax year or corrections. If something goes wrong, how do we fix it? This would lead to a greater risk of non-compliance.
There are pros to this though, especially for the employee. If they leave the company, the benefit stops, the tax stops. It doesn’t follow them in a tax code for years to come. The payslip potentially becomes a benefit statement, showing not just salary/wages, overtime, etc, but in real time benefits they are receiving. That means if they don’t want a benefit, the benefit can be stopped and the tax stops, its clearly displayed to them each pay period.
Payroll Bureau’s
Does your practice offer a P11D service to clients? Is this a revenue the practice will lose out on? Or will the practice charge clients for payrolling benefits, if so, how?
What about clients who process their own payroll but outsource the P11D process. Will they outsource the payroll too? Or try and bring the benefit process inhouse?
For small businesses, cashflow may also be an issue, as the payment to HMRC each month/quarter, will increase with the Class 1A value.
Agents have never been able to register to payroll a client’s benefits. HMRC have completed beta testing with some agents to allow the registration to be completed via the Agents Government Gateway, but this is not expected to go live until after 6th April 2024. Is this too little, too late, or will registration still be required beyond April 2026?
The mandatory payrolling benefits process is expected to be different to the current voluntary option. More data about each benefit will be required - currently, just a value is submitted, unless it is a company car. But what else will change? Hopefully the draft legislation expected in late 2024, will provide the details required to help practices plan and prepare clients for these changes.
Future
In order for HMRC to make payrolling benefits mandatory, there are still a number of issues that need to be addressed before April 2026.
For example, there are two benefits that still cannot be payrolled, living accommodation (section D) and loans (section H). This is because they both rely on the official rate of interest to calculate their CEV.
We also have the question of benefits provided to employees who are no longer on our payroll/PAYE - this could be due to retirement or the employer agrees to provide a benefit after the employee has left. How would those benefits be processed?
There are a small number of employees who complete self-assessment and have an outstanding student loan. If they have received a P60 which contains taxable pay relating to payrolled benefits, their student loan deduction, under self-assessment, is calculated on the higher taxable value, not the amount they received.
We still have 2 tax years to volunteer to payroll our benefits, but why would we do that? Because under the voluntary option, you could phase in the changes, instead of payrolling all benefits, you could just select one, maybe PMI. Instead of payrolling for all employees, you could select a small group of employees to trial it for a year, establish what works well, and where improvements are needed.
But it is very unlikely this will be an option when payrolling becomes mandatory for tax year 2026-2027. It will simply be live, and any issues, including employee questions, will be left with the payroll team to manage.
Written by Jo Marshall, Yorkshire Payroll Services Ltd
http://www.uktraining.eu/news-article/mandatory-payrolling-benefits/174