Payrolling benefits refers to the process of taxing certain employee benefits (also called benefits-in-kind) through the payroll system, rather than reporting them separately via forms like the UK’s P11D at the end of the tax year.
To Payroll your benefits you will need to have registered with HMRC before the start of the year.
Payrolling benefits will apportion the cash equivalent value of a benefit over the tax year, this amount is added to the employee's taxable pay each period and taxed accordingly. Benefits will show on the employees' pay slips.
Getting Started
- Go to Payroll Settings > Benefit Categories.
- Tick the 'Payrolling' check box, then you'll see an additional field which is to ask if you have registered - until this is ticked and the year is selected and saved you can't access the 'Add' button.
Click on the 'Add' button.to create a new category
Year - Shows the year start date for the benefit to be active for.
Carry benefit forward - Tick or untick the carry benefit forward check box, any benefit categories with this check box ticked can be duplicated for the next year as part of the year end process.
Benefit type - Choose from the drop down list of benefit types - e.g. F: Cars and car fuel or I: Private medical treatment or Insurance.
Payrolling benefit - The payrolling benefit check box, will be automatically set.
- Once a benefit type is chosen, a number of fields relating to that benefit type, will appear.
NI treatment - defaults to the NI treatment for the selected benefit type
Name - free text field for you to name the benefit e.g. Health insurance
Annual Taxable amount
Additional fields for specific benefit category - Fill in these fields with the relevant information required.
Save button - Saves the benefit category.
- Once you have created the benefit category you will need to add benefits to employees.
- Navigate to an employee using the Employee list.
- Click on 'Benefits' from the menu items.
- Select the 'Add' button, pick from the benefit categories you have created e.g. Car or Health Insurance. A number of disabled fields will show the values entered at benefit category level.
- You will need to fill in the details of the blank fields, the below will assist you to do this:
Carry benefit forward - this will reflect the setting from the benefit category, if the benefit category is ticked this can be ticked or unticked at employee benefit level. If this is unticked at benefit category level, then this cannot be ticked at employee benefit level.
Annual cost to you or amount foregone - This will reflect the setting from the benefit category but can be changed if required.
Amount made good - Add in any annual amount made good from the employee (this is an amount the employee is contributing towards their benefit, add in the whole year value even if this is being paid by the employee each period).
Cash equivalent - is calculated by the system as 'Cost to you or amount foregone' less 'Amount made good'.
Calculate benefit from -(only enabled when setting up the benefits before a pay run has been processed) this field will be locked once a pay run, which includes this benefit, has been processed. It is used to calculate the amount to be payrolled per period.
If the benefits are being payrolled, as they are linked to an employee, the system will calculate the amount to be added to the employee's taxable pay each period, by taking the annual cash equivalent, less any amount payrolled to date and dividing it by the number of periods the benefit is available for.
(If a pay run has not been processed for this employee yet, the system will initially need to use the entry in the 'Calculate benefit from' field).
- Once the benefit has been processed in a pay run, the system will know which period to use and you will no longer have access to the calculate benefit from field.
The amount to be payrolled each period value shows in 2 decimal places, but will be re-calculated in each pay run to account for any rounding differences or changes.
If you have moved to use this software during the tax year and this benefit has already been partially processed in another payroll system, when you initially create the benefit before a pay run is processed, you can add in the amount payrolled to date and set the relevant period number. The calculated amount to be payrolled, based on the information provided, will be shown.
You will also need to add the total amount payrolled to date into the Payrolled benefits field on the Earnings tab of the Employee's 'Opening Balances' under the 'Earnings' tab.
When the payroll is processed the benefit will be included in taxable pay, taxed and will show on the pay slip.
You can also set the 'Pro-rata in first pay run' check box here. If ticked, when the benefit is picked up in the first pay period, a further pro-rata calculation will be performed to work out the number of days in this pay period the benefit was available for, and will amend the amount to be taxed in that pay run.
Any further pay runs will be re-calculated based on the cash equivalent, less the amount payrolled to date, divided by the number of remaining pay periods.
If an end date is entered, then the calculation will work out the number of days the benefit is available and will stop taking that benefit once the end date has passed.
In order to link a benefit category to multiple employees, once a new benefit category has been created, click on the wording on the benefit in the list which informs you how many, (if any), employees are linked to this benefit category.
Once clicked upon, a panel will open showing you the employees the benefit is linked to. To add this benefit to more employees, click on the 'Add' button, a list of un-linked employees will show and you can select which ones to link the benefit to.
Once selected, click Save.
Note, car benefits should only be added from the employee record.
Edit and delete benefits
You can edit the employee benefit from this linking panel, in order to add an amount made good, (or alternatively navigate to an employee and select the Benefits menu item to edit the benefits there). Benefits remain open for editing up until they begin to be processed in the payroll. Similarly, if you make a mistake and wish to remove an unprocessed benefit from an employee, you can either use the Benefit categories linking panel to remove the link or delete the benefit directly from the employee record.
Best practise is to terminate an employee within their final pay run. When an employee has payrolled benefits, entering a termination date within a pay run, will bring in the outstanding amount to be taxed on any benefits. Most benefits are for a full year, so the amount remaining will be added to the last amount of pay and the taxable pay including the benefit values, will be used to calculate the tax. These values will then be reported to HMRC. If the full amount cannot be taxed in this final pay period, then HMRC will be aware of the amount of taxable pay and tax taken, and they will be able to sort any tax owed directly with the employee.
If the benefit is stopping at the same time as the employee is leaving, then you can edit the benefit at employee level and use either the pro-rata dates, benefit date available to, or adjust the cost to you in order to recalculate the amount of benefit outstanding. Once done, this re-calculated value can be seen in the pay run. When an employee has payrolled benefits it is not possible to add a termination date later than the end of the current pay period.
Terminating an employee who has payrolled benefits from within their employee details using the Terminate button, will have no effect on payrolled benefits and as such, any outstanding amounts will need to be reported to HMRC by you, outside of the payroll.
For detailed information on benefits, please refer to the HMRC guidance.