With the start of each new tax year comes the chance to “payroll” your employees’ benefits in kind. What are the advantages of payrolling and how does it work in practice?

Payrolling recap

If you registered with HMRC before 6 April 2020 you can use the system for payrolling benefits in kind that you provide to directors and employees for 2020/21 and later years. The concept is simple; work out the taxable amount of the perk, divide it by twelve (where the employee is paid monthly, by 52 if they are paid weekly) and increase the amount on which they pay tax (but not NI) each payday by that amount.

Example. Acom Ltd provides free medical insurance to its workers. If the annual taxable value for a worker is, say, £1,200, Acom divides that by the number of regular paydays falling in 2020/21 say twelve, giving £100. It adds this notional amount of pay to the worker’s actual monthly salary and taxes the whole amount. By the end of 2020/21 the employee will have paid the correct amount of tax on the benefit.

Tip. While strictly you can’t use payrolling for 2020/21 if you haven’t registered, HMRC will allow you to use it for the remainder of the year, subject to conditions, i.e. you’ll still be required to report details of the benefit on Form P11D.

An uncertain amount

From our example you might have spotted a problem with payrolling; it’s quite likely that Acom won’t know how much the medical insurance premium will be at the start of the tax year, so how can it include the correct amount of notional payment in the employee’s pay? The good news is that there’s a simple solution.

Example. At the start of 2020/21 Acom calculates the notional amount based on the previous year’s medical insurance premium, say £1,200. When the actual premium is known, say £1,500, it deducts from it the amount payrolled in the year so far, say £600, and divides the result, £900, by the remaining paydays in 2020/21, i.e. six. That produces a figure of £150 which is the new notional figure to be added to the worker’s monthly salary.

Tip. The same method can be used if by mistake you include the wrong notional amount in an employee’s pay. However, a slightly different method must be used where the taxable amount of the benefit varies from month to month.

Example. In 2020/21 Acom provides a company car to a director. If she changes it for a more efficient model in September 2020, Acom must work out the taxable amount of benefit for 2020/21 for the old car up to the date of change, say £2,000, and the new one thereafter, say £1,500. It adds these together and deducts the amount already payrolled, say £1,900, and divides the result by the number of paydays remaining in 2020/21, e.g. six; that gives £266.66, which is the notional amount to add to the director’s monthly pay.

Late adjustment

If, in our last example, Acom was late making the adjustment, say instead of applying it in month six of 2020/21 it applied it in month seven, it must use a combination of the methods explained in the second and third examples above to arrive at the correct notional pay to include for each month.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.