Everybody knows that once you start earning over a certain amount of money each year, you have to pay tax on your subsequent earnings. For most people, this is done through the PAYE (Pay As You Earn) system, which means that the tax you owe is automatically taken out of your paycheque. The only exception to this is if you are responsible for your own tax, such as if you are self-employed, in which case you may have to make a separate payment to HMRC to cover your tax.
However, what many people don’t realise is that benefits provided by your company also have an impact on your tax. This guide takes you through the key aspects of company benefits, including what they are, how they affect the tax you pay and how this relates to the payroll.
What benefits do companies usually provide?
The benefits offered by your company are likely to depend on factors such as the number of employees and the type of work you do. However, typical company benefits include things like expenses, bicycle schemes, season ticket loans and insurance if you are required to work abroad.
Benefits can also include shares in the company, bonuses related to performance, company cars, health insurance and sometimes even living accommodation. You should be able to get a full list of benefits from your own employer if you are not certain what you are offered.
How does this affect your tax?
This is where things can get a little bit confusing because not all company benefits require you to pay tax on them. For example, if your employer provides you with health insurance, this will require you to pay tax on the value of the monthly premiums. However, if they simply provide you with an annual check-up or medical cover if you are required to work abroad for a time, this won’t be taxable.
Other examples of non-taxable benefits include loans of less than £5000, a work mobile phone, food in the staff canteen (with a few exceptions), childcare, Christmas parties and parking at your workplace.
However, other benefits require tax to be paid on them. Often this will be done through your employer’s Class 1A National Insurance Contributions, which include any non-cash benefits they provide you with. This means that you are not personally responsible for paying tax on them.
This is not always the case, though. Some benefits are treated as though they are cash, usually because they have the potential to be exchanged for cash or because they are cash (such as shares or bonuses). This means that you will be required to pay Class 1 National Contributions based on their value.
As you can see, the issue of benefits can be very complicated, and so it is a positive thing that we now have payroll software that can deal with many of the calculations relating to tax on benefits.
What is the P11D form?
The P11D is a form from HMRC that details all of the benefits you are given by your employer. This will usually be completed by the payroll department. It has to include information on benefits such as money transferred to you, company car details, vouchers, living accommodation, health insurance, relocation payments and more.
It is designed to let HMRC know the value of your company benefits and to work out which ones attract Class 1 National Insurance contributions. It requires employers to detail the cash value of the benefits they’ve given you and it is a statutory requirement, which means it has to be completed. The form can be completed as a hard copy, but it is more common to complete it electronically now.
Why does it need to be included in the payroll?
All of this information relating to company benefits needs to be included in the payroll data to make sure accurate records are kept about what you are receiving. This is particularly important because if you are required to pay additional NI contributions based on your benefits, this will usually be done through the PAYE system.
Luckily, payroll software is able to deal with most of the complication calculations to determine how much tax is owed on your benefits. Payroll staff might benefit from some training in payroll software to make sure they understand how the benefits system works, because it can be quite confusing when some benefits attract tax while others don’t.
Overall, while company benefits are definitely something to be celebrated, they also come with tax responsibilities and so it is important for everyone – payroll staff and other employees alike – to understand how they work so no one gets any surprises when it comes to how much tax they are paying.