HR · 18 December 2015

Small firms urged to act now on HMRC employee payrolling changes

Small firms are advised to let HMRC know by 21 December whether a switch will be made to the new employee payroll benefit system

The government has advised small businesses considering switching to a new system of employee payrolling benefits in April 2016 to act urgently now and tell HMRC before a 21 December deadline to minimise potential problems.

The new system, to be introduced for the 2016/17 tax year, will give employers control over automatic deductions of income tax and national insurance contributions on benefits in kind through the company payroll, avoiding the need for benefits to be coded out through an employee’s PAYE code, or the need for them to be submitted to HMRC on a P11D form at the end of each tax year.

Benefits such as private health insurance, a company car and fuel can be included in employees payroll submission each month under the rules of the new system.

“Putting benefits through the payroll is likely to reduce burdens for employers and their employees,” said head of national tax at accountancy firm Smith & Williamson Tina Riches. “Employers can find completing P11D forms burdensome and time consuming. In addition, the coding out of benefits usually lags behind the real benefits so often results in under or over payments for the employee,” she added.

Many small businesses are expected to transition to the new system, which promises to provide HMRC with more information on employees much earlier than the previous system. Once an employer tells HMRC it is joining the new system, government will identify the employees with the relevant benefits and remove the benefits from tax codes – issuing new codes.

By making the intention to switch known by the 21 December deadline, firms will give HMRC time to remove benefits in kind from the coding notices of workers before sending them out in January.

“Where employers meet the deadline, employees coding notices should be adjusted in advance of the start of the next tax year,” said Riches. “Otherwise, the benefit may be removed at a later stage, with no guarantee that it will be done before the start of the tax year, with the risk that employees could end up being taxed twice until the code is adjusted.”

Riches added: “To ensure employees aren’t badly affected, employers should keep their employees informed as soon as possible of the implications if they start payrolling.”

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Fred Heritage was previously deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London.