First published on Friday, September 27, 2024
Last updated on Friday, September 27, 2024
Managing payroll and employee benefits can be complex, but there's an effective way to simplify the process while maximising tax efficiency—payrolling benefits.
Payrolling allows you to manage employee benefits and their associated taxes through the regular payroll system, offering multiple advantages for both your business and your employees.
If you haven’t yet explored this option, here’s why you should consider it and how it can work for you.
What is payrolling of benefits?
Payrolling benefits means that the taxable value of certain employee perks (also known as benefits in kind), like company cars, health insurance, or gym memberships, is added to your employees’ salary for tax purposes.
Instead of reporting these benefits through P11D forms at the end of the tax year, the tax is collected in real-time via PAYE (Pay As You Earn). This gives your employees a smoother tax experience, avoiding the unexpected year-end tax bills that come with the traditional P11D system.
By adopting payrolling, you simplify your administrative processes and provide greater transparency to your workforce.
Why you should payroll benefits?
There are many advantages to gain, let's take a look at some:
Cut down on administrative work
Filing P11D forms for each employee at the end of the year is time-consuming. By payrolling benefits, you avoid this extra paperwork (with the exception of a few types of benefits that still require P11D reporting, such as living accommodation).
You'll spend less time compiling forms and avoid errors that might occur when preparing year-end tax reports. This means you can focus your resources on other important business activities.
Smoother cash flow
Payrolling allows tax to be deducted gradually throughout the year, aligning tax payments with each pay period. This spreads the financial impact for both you and your employees.
Your staff won’t have to deal with unexpected tax adjustments after the end of the tax year, making it easier for them to manage their personal finances.
From a business perspective, this consistent approach helps you plan your finances with greater accuracy.
Clearer, more transparent process
Employees can see how much tax they’re paying on their benefits each month, which provides transparency and helps avoid confusion. Without payrolling, employees might be caught off-guard by an adjustment to their tax code or a large end-of-year tax liability.
By incorporating benefits into their pay packets, you make it easy for them to understand exactly what they’re being taxed on, improving trust and communication between you and your staff.
No tax code adjustments
When benefits aren’t payrolled, HMRC adjusts your employees’ tax codes to account for the taxable value of those benefits. This can lead to confusion, delayed adjustments, or errors.
By payrolling, you eliminate the need for HMRC to make these adjustments, ensuring smoother, more accurate tax calculations for both you and your employees.
What benefits can you payroll?
Most taxable benefits can be payrolled, including but not limited to:
Company cars and fuel
Private medical insurance
Subscriptions and memberships
Gym memberships
Company-provided assets (like mobile phones)
However, some benefits, such as employer-provided loans or accommodation, still require a P11D form. Before deciding to payroll benefits, it’s important to verify which perks are eligible which can be done on the UK government’s expenses and benefits list.
How to get started with payrolling benefits
Once you have deterimined which benefits you want to payroll, there are several steps you should take:
Register with HMRC
To start payrolling benefits, you need to register with HMRC before the start of the tax year. You can’t begin payrolling halfway through the year, so it’s important to plan ahead and register on time.
HMRC offers an online service that makes this process straightforward.
Inform Employees
Once you’ve decided to payroll benefits, make sure to clearly communicate this change to your staff. Let them know how it will impact their payslips and that they’ll be taxed on their benefits in real-time.
This ensures that everyone is on the same page and prevents any misunderstandings.
Adjust your payroll software
Most modern payroll software—like BrightHR Payroll—can accommodate payrolling benefits, but you’ll need to ensure it’s set up correctly.
You may need to make adjustments to reflect the taxable benefits, so check with your payroll provider contact to ensure a smooth transition. Or if you need payroll software, get in touch with our payroll specialists to discuss your options of software to start payrolling benefits.
Maintain accurate records
While payrolling eliminates much of the administrative hassle associated with benefits, you still need to keep detailed records. You should still accurately track which benefits are being payrolled and at what value, to avoid complications later on. This will also be important for completing your annual reports to HMRC.
The long-term benefits of payrolling benefits
Beyond the immediate administrative savings, payrolling benefits can improve overall financial management for your business. By spreading the tax burden over the course of the year, you help your employees better manage their finances, which can boost morale and employee satisfaction.
For you, it means fewer end-of-year headaches and more time to focus on growth rather than paperwork. Plus, by adopting a more transparent payroll process, you may even improve retention, as employees will appreciate knowing exactly where their money is going each month.
It’s a small change, but it can make a big difference in the financial clarity and trust within your business.
Start payrolling your benefits with BrightHR Payroll
As a UK employer, payrolling benefits is a powerful way to simplify your tax processes and make life easier for your employees. By registering with HMRC and incorporating taxable benefits into your payroll system, you reduce administrative burdens, improve cash flow, and enhance transparency.
Whether you manage a small business or a large organisation, payrolling benefits can help streamline your operations while keeping your team happier and more financially secure.
Not to mention, that payrolling your taxable benefits in kind will become a mandatory requirement for all employers from 6 April 2026.
So, why not make the switch and start taking advantage of the benefits of payrolling today? Book a free BrightHR Payroll demo.
