Benefits in Kind : Changes ahead
By Andy Vessey
Next year sees major changes to taxation of benefits-in-kind
Following legislation included in Finance Act 2015, three significant changes in the taxation of expenses and benefits in kind that employers give to their employees will take effect from 6 April 2016, namely:
- Abolition of the £8,500 threshold for taxing certain benefits in kind;
- Voluntary ‘payrolling’ of benefits in kind; and
- Replacing dispensations with an exemption for paid or reimbursed expenses
Abolition of the £8,500 threshold for taxing certain benefits in kind
The £8,500 threshold for taxing certain expenses and benefits in kind will be abolished with effect from 6 April 2016. With the steady rise over the last few years in the level of the Personal Allowance the vast majority of employees earning at a rate of less than £8,500 a year are no longer liable to pay income tax.
This means that from 6 April 2016 employers will need to report all expenses and benefits in kind on form P11D, unless they intend to use ‘voluntary payrolling’.
From 6 April 2016 Class 1A NICs will be payable on all benefits in kind, regardless of an employee’s earnings, and should be reported on form P11D(b). There will be no changes to the payment dates for Class 1A NICs.
Voluntary ‘Payrolling’ of benefits in kind
A new statutory framework will allow employers to deduct the tax due on benefits in kind through their payroll rather than through an employee’s tax code. Initially employers will be allowed to payroll four benefits in kind:
- car fuel;
- private medical insurance; and
- subscriptions, e.g gym membership
Employers wishing to payroll any of these benefits in kind will need to register their intention with HMRC. A new online registration service will allow businesses to do this from July 2015. Once registered an employer will not need to complete a P11D for those benefits in kind which have been registered to ‘payroll’ once it is introduced from April 2016.
Payrolling benefits in kind should result in fewer tax coding notices being issued, as well as fewer under and overpayments of tax.
The draft regulations setting out the framework for voluntary payrolling will be published in the summer for consultation.
Replacing Dispensations with an exemption for paid or reimbursed expenses
At the moment, where an employer pays or reimburses deductible expenses (or provide benefits in kind that are covered by a matching deductible expense) to any of its employees, they have to report these on form P11D and those employees must then contact HMRC to claim back any tax relief they are entitled to. That is unless these are covered by a ‘dispensation’ - an agreement that specifies expenses and benefits can be provided to employees without deducting tax and NICs, and without reporting them to HMRC.
From 6 April 2016, a new exemption means employers will no longer have to agree a dispensation with HMRC or report expenses or benefits in kind on form P11D where the employee is entitled to tax relief for those expenses or benefits in kind. Those expenses or benefits in kind will now be exempt from income tax. This means however, that businesses will need to determine the correct tax treatment of the expenses they pay to their employees and whether a matching deduction is due. Records will still need to be kept of what has been paid or reimbursed to employees as is currently the requirement. The exemption will not apply in conjunction with a salary sacrifice arrangement.
The exemption will also apply if an employer pays approved scale rates to their employees in respect of certain expenses that they incur, rather than reimbursing the actual amount of the expense. Businesses will be able to use either HMRC's benchmark scale rates for subsistence, or apply to the department for a ‘bespoke scale rate’ based on evidence of the amounts employees actually incur on the relevant expense. Where employers have recently agreed a bespoke scale rate with HMRC as part of their dispensation, they will be able to apply to continue to use that scale rate without providing further evidence until the fifth anniversary of the rate being agreed.
Published July 2015