By payrolling benefits you can deal with the tax on your employees’ benefits as part of your regular payroll activities by adding the cash equivalent of the benefit to their salary each pay period. Payrolling also allows employees to pay the tax on their benefits in real time.  

By opting to payroll benefits, as long as you payroll all of the benefits you offer, you can avoid preparing P11D forms at the end of tax year – although you will still need to prepare a P11D(b) to calculate your employer’s Class 1A National Insurance liability. If you only opt to payroll some of the benefits you provide, then P11Ds must be prepared for those benefits not included on the payroll.

All benefits - apart from living accommodation and interest-free or low interest loans subject to the beneficial loan interest charge - can be payrolled. 

Getting started 

If you would like to start payrolling benefits from 6 April 2022, the first thing is to check with your payroll provider to ensure that your software will allow you to.   HMRC’s Basic Payroll Tools is already set up to allow employers using this software to payroll benefits.

Once you have confirmed that your payroll software is suitable, you can register with HMRC through their payroll benefits and expenses online service.  

You need to apply to HMRC before you can start to payroll benefits. Applications must be made on or before the start of the first tax year that you intend to payroll benefits. The deadline to apply to payroll benefits for tax year 2022-23 is 5 April 2022.  

Once you have opted to payroll benefits, it is assumed that you will continue to payroll benefits for your employees in future years.   

Payrolling in practice

To payroll a benefit, you add the cash equivalent of the benefit for the pay period as an adjustment to the employee’s taxable pay. The revised taxable pay figure is then processed through PAYE. Once the value of the benefit is included in their taxable pay, the income tax for the employee is calculated, collected and paid on the benefit in real time throughout the tax year. 

In general, you will only be collecting income tax via PAYE. Payrolling a benefit doesn’t mean that you will need to start deducting employees’ Class 1 NIC too since changing how you handle benefits doesn’t change the position for NIC.

In general, employees don’t need to pay Class 1 NIC on their benefits unless the benefit is the provision of ‘money’s worth’ to the employee (such as payments in the form of vouchers or precious metals such as gold) or the employer has settled an employee’s debt or met an employee’s own liability that they would otherwise have to pay themselves.  

You don’t have to payroll all of the benefits you provide if you don’t want to. As an employer, you can select which groups of benefits you want to payroll. HMRC’s systems will automatically identify all your employees who have the benefits you have chosen to payroll in their tax code and remove the benefit from their codes to ensure that the tax is not collected twice.

You can also opt individual, or groups of, employees receiving a benefit out of payrolling using the online service if you would prefer to deal with their benefits in the traditional manner.  

Notifying employees

If you register to payroll benefits, you must give your employees written notification explaining that what this means for them by 1 June after the end of each tax year.

This notification must include:

• an explanation that they will not be taxed twice because you have registered to payroll their benefits;
• details of the benefits you have payrolled, including their cash equivalent;
• the amount you have payrolled for optional remuneration (if any); and
• details of any benefits you have not payrolled.

In the first year of payrolling, you should also inform employees that:

• their tax code will change to take out the adjustment for their benefits in kind;
• you will put the adjusted amount through payroll each month and they will pay tax on that amount; and
• at the end of the year you will tell them how much taxable benefit they have had in the year and what it was for.

End of year processes

If you opt to payroll all the benefits suppled to all of your staff, you will not need to prepare P11Ds for individual staff at the end of the year. However, you will need to prepare a P11D(b) to pay your Employer’s Class 1A National Insurance on relevant benefits. 

If you choose not to payroll all of the benefits you provide, then any benefits not payrolled need to be reported on individual P11Ds in the usual manner. 

Further guidance 

If you are interested in learning more about payrolling benefits, further guidance from HMRC can be found here.