Benefits in Kind and Payroll
Payrolling of Benefits
Benefits in kind and payroll reporting have changed significantly in recent years. Historically, most taxable benefits were reported after the end of the tax year using form P11D. PAYE Settlement Agreements may also apply in some situations, but they are not directly interchangeable with P11D reporting and are outside the scope of this article.
Some benefit-related amounts have always appeared in payroll, but usually as deductions from employees’ net pay after tax and National Insurance have been calculated. A common example is private medical insurance where the employee pays an additional amount to cover dependants.
On the P11D, the total value of the benefit is reported. Where the employee has contributed from net pay, this is shown as an amount “made good”, reducing the taxable benefit on which further tax or National Insurance is due.
Beware: The “employee made good” section relates to employee contributions made from net pay. This is not the same as a benefit being payrolled, where only the tax on the benefit is collected through payroll.
The Timeline
| Pre April 2016 | Only net deductions would be processed via payroll then recorded on a P11D |
|---|---|
| April 2016 |
Voluntary payrolling of benefits in kind becomes available Informal payrolling of benefits also available |
| April 2023 | Informal payroll of benefits no longer available |
| April 2026 |
Original date for mandatory payrolling of benefits Portal closed for registration for voluntary payrolling of benefits |
| April 2027 |
Mandatory payrolling of benefits Later switched to just mandatory for cars, vans and medical |
| April 2028 | Remaining benefits expected to be reported through payroll on a mandatory basis |
Voluntary payrolling of benefits in kind: The employer registers with HMRC in the preceding tax year and identifies the benefits that will be processed through payroll.
Informal payrolling of benefits in kind: Benefits were processed through payroll, but registration was completed during the current tax year. P11Ds were still required, with the relevant benefits identified as having been reported through payroll. From the following tax year, the arrangement would then be treated as voluntary payrolling as long as registration had been completed.
RTI: Real Time Information. Under payrolling, the taxable value of the benefit is reported as it is provided, rather than after the end of the tax year.
Tax code impact: Where a benefit is payrolled correctly, the employee’s tax code should generally not need to include an adjustment for that benefit. Where a benefit is reported on a P11D, HMRC may adjust the employee’s tax code to collect the estimated tax due.
Important note: If an employee previously had a benefit reported on a P11D and that benefit is then moved into payroll, their tax code may increase. This is because the code may previously have included an estimated adjustment for unpaid tax in the current year, which should no longer be needed once the benefit is taxed through payroll.
P11D(b)
However benefits are reported, employers currently still need to complete a P11D(b). This reports the total value of relevant benefits and is used to calculate the employer’s Class 1A National Insurance liability. The current submission deadline is 6 July following the end of the tax year, with payment due by 22 July where paid electronically. Once benefits become mandatory within payroll, it is not yet clear whether the P11D(b) will be withdrawn immediately or retained during a transition period.
We expect Class 1A National Insurance to move towards real-time reporting and potentially become payable alongside the usual PAYE liability. Further guidance will be needed before the practical payroll process can be confirmed.
Anticipated Technical Issues
There are several technical issues with moving benefits in kind into payroll. The first is often overlooked: by definition, benefits in kind are benefits provided outside payroll, so payroll systems need to capture and report information that has traditionally sat elsewhere.
At present, benefits reported through payroll are generally submitted to HMRC as taxable values, with limited separation by benefit type. If registration requirements are removed, RTI will need a mechanism to identify and itemise different benefits. This is likely to require new benefit codes and additional payroll reporting fields. Our suspicion is that this increased RTI complexity is one reason the rollout has become staged.
Employee made good: Currently, payroll reporting usually reports the taxable benefit value after taking account of any employee contribution, rather than reporting the gross benefit and then separately deducting the amount paid by the employee from net pay. This approach may continue, but it may need to change depending on HMRC’s final reporting requirements.
P11D(b): The P11D(b) process will need to change if more benefits are reported in real time. There may be different versions or transitional reporting requirements until all relevant benefits are processed through payroll, at which point the form may eventually be withdrawn.
Valuing the benefit: Calculating the correct taxable value can be difficult, and this challenge already exists for P11D reporting. Payrolling may simplify the employee’s tax position, but it could create timing issues if the final benefit value is not known until later in the tax year.
April 2027 transition: As reporting requirements change, payroll processes will need to adapt at the start of the tax year. Until HMRC confirms the detailed requirements, the practical impact on payroll setup, RTI submissions, employee communications and reconciliation remains uncertain.
Useful resources:
https://www.gov.uk/paye-settlement-agreements
https://www.gov.uk/employer-reporting-expenses-benefits