Employment benefits: reporting window is just around the corner

This post is part of our Entrepreneurial team’s regular series of blogs.

With the end of the tax year just over one month away, it’s time for employers to consider how they’ll be reporting employment benefits.

There are three options when it comes to reporting and paying the income tax and National Insurance (“NI”) due to HM Revenue & Customs (“HMRC”).

What are employment benefits?

Employers can provide their employees and office holders with a variety of benefits to incentivise new talent and give them that extra sweetener on top of basic salary. Common examples are medical insurance, gym memberships, company cars and interest-free loans. A checklist summarising common benefits provided to employees, which may need to be reported to HMRC, is available on our website – if you are unsure if you have taxable benefits to report, you can use the checklist which is available here.

P11D Forms

P11D forms are the most common way to report non-cash benefits provided to employees. Separate P11D forms for each employee receiving benefits and a P11D(B) form to declare the total Class 1A NI due by the employer must be submitted to HMRC. There is only a short window for the preparation and submission of these forms, as P11D forms for the tax year ended 5 April 2021 need to be submitted by 6 July.

The employees will be subject to income tax at their marginal tax rate on the “cash equivalent” value of the taxable benefit. The income tax due will either be collected via the employee’s PAYE tax code or their tax return if they submit one. The employer will be due to pay Class 1A NI at 13.8% by 19 July (or 22 July if paid electronically).

PAYE Settlement Agreement (PSA)

Alternatively, an employer can enter into a PAYE Settlement Agreement (PSA) with HMRC to report certain types of benefits. These allow the employer to settle the tax liability on ‘minor or irregular’ benefits on behalf of the employee. Under the PSA, the income tax liability is payable by the employer on behalf of the employee and it is calculated on a ‘grossed up’ basis. This can prove to be expensive as the total of the income tax and NI due (Class 1B NI at 13.8%) can be as much as the cost of the benefit itself (in the case of higher rate and additional rate tax payers). However, this is the best method for reporting minor benefits like staff entertaining, where an employer does not wish to burden their employees with any tax due.

HMRC must be notified before the 6 July after the tax year end for which you first wish the PSA to be in place. The PSA calculations detailing the income tax and NI due should be submitted by this date. The income tax and Class 1B NI liability is then payable by 19 October (or 22 October if paid electronically).

Payrolling benefits

It is possible to opt for ‘payrolling benefits in kind’, with the income tax due collected via the payroll in monthly instalments. A P11D(B) submission is still required with regard to the payment of the Class 1A NI but individual P11Ds are not required. As above, the P11D(B) will be due to be submitted to HMRC by 6 July with the Class 1A NI due for payment by 19 July (or 22 July if paid electronically).

The payrolling of benefits does require a registration to be in place before the start of the tax year you wish to start using the scheme. If you wish to payroll benefits for the tax year ending 5 April 2022 you should act to put this in place before 5 April 2021.

If you require any assistance with regard to the reporting of taxable employment benefits, bearing in mind the 6 July deadline, please contact us at Chiene + Tait as soon as possible.

The Employment Allowance is changing

What is the Employment Allowance?

The UK Government provides an annual allowance of £3,000 to employers, which they can off-set against their employers’ (secondary) Class 1 National Insurance Contributions (NICs).  It was introduced as an incentive for organisations to help recruit their first employees or expand existing work forces in addition to providing a restriction for existing employers.

 

What is changing?

The Government has announced a change to Employment Allowance legislation effective from April 2020.  The allowance will only be available to employers with a secondary (employer’s) NIC liability of £100,000 or less.  The amendment essentially withdraws the allowance for medium to large sized organisations, it is estimated that over 100,000 employers will be affected.  Over 99% of micro-businesses and 93% of small businesses will still be eligible for the allowance.

An additional complication is that by restricting the allowance to employers with a less than £100,000 secondary NIC’s bill, the allowance will now be classified as State Aid.  Going forward, the rules on de minimis State Aid will need to be considered by employers before claiming Employment Allowance, if it applies to their organisation.  Employers will need to make sure there is availability within their sector’s state aid budget to claim Employment Allowance before they do so.

Which organisations will be able to claim Employment Allowance from next year (2020/2021 tax year)?

  • All businesses and charities paying employers’ NICs with an employer’s NIC’s liability of under £100,000
  • Linked companies with a combined employers’ NICs liability of under £100,000

 

Which organisations will not be able to claim?

  • Employers with a secondary NICs liability of over £100,000
  • Linked companies with a combined secondary NICs liability of over £100,000
  • Single director payrolls where they are the sole employee
  • Employers who have only personal, household, or domestic workers on their payroll, excluding care or support workers
  • Public bodies or businesses doing more than half their work in the public sector, excluding charities
  • Service companies working under ‘IR35 rules’ whose only income is the earnings of the intermediary

 

What should organisations do about the change?

There are five action points for employers to complete which will ensure that compliance obligations are met.  Employers must:

  • Have checked their employer National Insurance liability for the previous tax year was less than £100k
  • They have undertaken relevant checks with any connected businesses to ensure they are eligible for the employment allowance
  • Are the only connected business claiming the Employment Allowance
  • Will not exceed the relevant de minimis ceiling for state aid in their sector if they claim the Employment Allowance
  • They are not aware of any other reason why they may be excluded from claiming the employment allowance

If you have a query about the change to the Employment Allowance, contact the Chiene + Tait Payroll Team today at payroll@chiene.co.uk or call 0131 558 5800.