A Guide to: Employment benefits
Perks are important to appeal to the best new candidates and retain their current staff.
Perks have tax consequences and reporting requirements for the employee and the business and the rules can be very complex
An alternative option to preparing P11ds for taxable benefits is to put the benefits through the payroll
What you need to know
The provision of “perks” to employees has become increasingly common and is now an expectation for some employees. Therefore, it is something that businesses need to consider to ensure they are an attractive employer and they can appeal to the best candidates and retain their current staff.
However, many such perks have tax consequences and reporting requirements for the employee and the business and the rules can be very complex. Therefore, it is vital that you understand the consequences of each perk and ensure that you are fulfilling your filing requirements as an employer.
There are three main ways of categorising employment benefits:
- Exempt benefit – the item has no tax consequences for the employee and the employer has no additional tax liability on the item. There are no reporting requirements.
- Taxable benefit – the item is subject to income tax (but not NI) on the employee at their effective tax rate and the employer will have to pay employers NI (called class 1A NI) at 13.8%. These items will need to be reported on form p11d at the end of each tax year.
- Taxable remuneration – the item is subject to income tax and NI on the employee and the employer will have to pay employers NI. These items will usually be required to be processed through payroll.
A summary of the type of benefits that fall into each of these categories can be found below, and a detailed guide to the various types of benefits that can be provided and the tax implications of each is available on request.
PAYE Settlement Agreements (PSA)
Employees may look less fondly on the provision of any of these “perks” if they receive an unexpected tax bill from HMRC relating to it. There are two ways to avoid this:
- Ensure that employees understand the personal tax implications of all benefits provided to them before they accept them
- Enter into a PAYE Settlement Agreement (PSA) with HMRC to pay the tax on behalf of the employees.
Under a PSA the employer will pay the income tax and class 1A NI that arise on the benefit, and they will also pay class 1B NI at 13.8% on the income tax paid on behalf of the employees.
A PSA needs to be agreed with HMRC, preferably before the end of the tax year, and there are rules about the type of benefits that can be included. However, p11ds do not need to be prepared for any benefits included in the PSA so it can significantly reduce the administrative burden.
An alternative option – Payrolling benefits
You can choose to put the benefits through the payroll. Under this regime the employer is required to register for payrolling benefits with HMRC online and provide details of the benefits to be provided before the start of the tax year. The employees tax codes are then automatically adjusted for the value of the benefit by HMRC. The employer will still need to complete a form summarising the taxable benefits and pay the class 1A NI by the usual deadline but will not need to prepare a P11d for each employee.
This treatment is not available for the provision of accommodation and below market value interest rate loans.
Summary of Benefits
If you have any questions about any of the above items or would like assistance with preparing P11ds or applying for a PSA please get in touch.