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Taxing Employee Benefits - could payrolling ease the burden?

on Monday, 08 August 2016.

For the start of the current tax year, HMRC introduced a new service which enables employers to use their payroll systems to account for tax on the benefits they provide to staff.

It can be used on the taxable element of a school place where the entire fees are paid for under a salary sacrifice arrangement.

Rather than accounting for tax once a year through the submission of form P11D, the new service allows employers to automatically account for tax each pay day throughout the year. The service, called 'the payrolling benefits and expenses online service', came into effect at the start of the current tax year and should help reduce the administrative burden on employers and their payroll departments.

Employers had to register by 6 April 2016 in order to use the service for the current tax year. Those who missed the date for registration can now register in order to start using the service from April 2017.

Under the new service, the annual cash equivalent of the payrolled benefit is divided by the number of pay days the employee has in the tax year, and is taxed as if it were additional cash received in each pay period.

The introduction of the service applies to all benefits in kind, save for: accommodation, beneficial loans, non-cash vouchers and credit tokens. From April 2017 the service will be extended to include non-cash vouchers and credit tokens.

The Payrolling Service at a Glance

In February 2016, HMRC published some useful guidance about the new payrolling service. We set out below some key points to note:

  • Employers must register before the start of a tax year in order to payroll benefits in the forthcoming tax year.
  • Employers must ensure that their payroll software can collect the correct tax due on the registered benefits directly from their employees’ pay.
  • Once the payrolling of benefits starts it must continue for the entire tax year unless the employee has insufficient income to cover the tax on the benefit or the benefit ceases to be paid to the employee.
  • Employers must inform affected staff of their decision to use the service and explain the implications for them.
  • Employers must still calculate the Class 1 A NICs on the cash equivalent and submit the information via form P11D(b) to HMRC once a year.
  • There is no change to the way in which employers work out the cash equivalent of a benefit.
  • At the end of the relevant tax year employers must inform affected employees of the description of the benefits that have been payrolled, notify them of the cash equivalent and provide the details submitted on the form P11D(b).


Schools which operate a salary sacrifice for school fees scheme can use the new service to account for the tax payable on the marginal cost of the school place (being 15% of the full value of the place).

The service can therefore only be used for employees who sacrifice more than 85% of the school fees. As many employees choose to sacrifice the whole cost of the place, this service could ease the administrative burden on HR and/or finance teams.

However, still having to account for Class 1A NICs by submission of form P11D(b) may negate the administrative advantages it offers. Therefore, at this stage schools may feel that it is only worth keeping a watching brief on the service.

For more information, please contact Richard Hewitt in our Independent Schools team on 0117 314 5320.

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