Employee benefits taxation - what you need to know

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At the end of every tax year, payroll teams need to work their way through a mountain of paperwork to ensure their books are in order. Figuring out how much tax each employee owes on benefits in kind is a key part of this task. However, whilst perks such as employee cars, season tickets and private healthcare are often crucial to employee engagement, tax owed on them can be an administrative headache for payroll teams. The time spent sorting out benefits taxation often keeps payroll from adding value to the business beyond just tax compliance.

However, this process is changing. From the 2016-17 tax year, taxation on benefits can be administered through payroll and PAYE. Employers will no longer have to submit a P11D form for every employee and wait for HMRC to adjust PAYE tax codes. For payroll teams, this policy means they need to anticipate how much individual benefits are worth each period and deduct tax accordingly.

Instead of spending days locked in a room calculating what each employee owes, tax administration will now be spread evenly throughout the year. Initially, some professionals may be concerned that estimating the cost of some variable benefits – such as fuel allowances - will result in a greater burden than before. However, as the new system becomes established and payment patterns settle, administration will become evenly spread throughout the year. Indeed, the Government has calculated the new measures should result in a £9 million administrative saving for businesses over five years.

The new system will also mean payroll professionals can keep track of changes to employee benefits and the tax due on them in real time. For example, if an employee decided to opt-out of the company health insurance policy  or relinquish their company car, the details will be updated immediately and the tax liability adjusted in the next payroll. As a result, the process will enable payroll professionals to be much more responsive to changes in individual employees' circumstances. No longer will an employee be charged tax at the end of a year on a benefit they haven’t, in extreme cases, been receiving for much of the year. Equally the employee who receives a benefit partway through the year will not receive a hefty tax bill at the end of the year, as could happen in the days of the P11D. 

Yet it is not just payroll professionals who will benefit from the new policy. Employees will prefer the new process as it enables them to spread their tax payments more accurately throughout the year instead of having potentially to stump up a large sum in one go. In the past, the amount owed at the end of the year might have come as a nasty surprise. Tax on benefits through payroll gives members of staff visibility over what they owe and when it will be deducted. This enables employees to factor it in to their monthly budgets. Senior management will benefit from this too – knowing exactly how much in NIC1A that a business owes HMRC at any point during the year, rather than working off estimates that are finalised at the end of the tax year. 

The changes to benefits in kind taxation are a big step forward for payroll teams and employees alike. Whilst employees feel more in control of how much tax they owe, payroll professionals will have the administration burden split into more manageable chunks each period. While it might mean payroll professionals need to change their processes in the short term, this new taxation system will make life easier for employees, senior staff and ultimately themselves in the long term.

Bill Thompson, Principal Consultant – Payroll at NGA Human Resources

About NGA Human Resources UK

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