Following the end of each tax year, employers need to turn their attention to any reporting obligations they need to meet. From an employment tax perspective, this will include reporting any taxable benefits in kind, as well as notifying HMRC of any redundancy or termination payments where the total package exceeds £30,000.
Benefits in kind
HMRC requires employers to report taxable expenses and benefits provided to employees by 6 July, after the previous tax year has ended. For example, for the 2022/23 tax year, reporting must be done by 6 July 2023.
Employers are required to report any taxable benefits, for example, private medical insurance cover provided to employees, during the previous tax year. Most of the benefits are reported to HMRC based upon the cost to the employer, which will include VAT. However, there are certain exceptions whereby the benefit is calculated by some other method. The following comments below provide a high-level summary concerning the provision of:
- Living accommodation
- Company cars
- Employee loans
Whilst there are some roles where the provision of living accommodation is exempt, the use of those exemptions is outside the scope of this article.
The benefit in kind charge is calculated by reference to the value of the property, together with the cost of any improvements which have been carried out. The cost of improvements does not include general maintenance or upkeep of the property. Once the cost of the property has been established, the income tax charge will comprise two parts:
Part 1: first £75,000
The first part considers properties which cost less than £75,000. The charging provision (Section 105 ITEPA 2003) is based upon the rental value of the property, commonly referred to as the Gross Rateable Value (GRV), as of March 1973.
The GRV is set by the Rents Act 1973, but the same principles still apply even though the property may not have been built in 1973. For cases where the 1973 GRV is not available, HMRC has provided some practical guidance onwhere the GRV can be calculated, by reference to the Net Rating Value (NRV) (which is included on water rates statements) by using a formula:
GRV = (1.2 x N R V) + 32
Part 2: excess value over £75,000
If the property costs more than £75,000, a second layer of charge is calculated in respect of the excess amount, with the benefit being calculated on the basis that it is a loan.
||Benefit in kind
|3 bedroom property
|Additional tax charge
||£175,000 x 2%
|Total benefit in kind
|Tax due (say) 40%
|National Insurance (NI) (14.53%)
 Additional charge is based upon the notional interest rate at the beginning of the tax year.
Regardless of whether any accommodation provided is taxable or exempt (on the basis it satisfies one of the conditions set out above), a benefit in kind will always be due in respect the cost of utilities paid for by the employer. Where an employee is provided with exempt accommodation, the only costs which will also be treated as exempt relate to:
- Council tax
- Water charges
- Sewerage charges
All other utility costs paid for by the employer will be treated as a benefit in kind. For NI purposes, it is our understanding that all the utility bills are in the name of the employer. Consequently, Class 1A NI will be due on the proportion of the costs which are paid by the employer. The Class 1A NI liability will be due for payment to HMRC by 19-21 July, following the end of the tax year (21 July applies where the Class 1A NI is paid via BACS).
However, when the employer is paying or reimbursing any utility bills, and when the contract is between the service provider and the employee, those costs will be subject to Class 1 NI, with the liability (both Primary and Secondary contributions) being due for payment as part of that month’s payroll.
A benefit in kind charge will arise on the basis that the car is available for private use by the employee and is calculated based upon:
- Manufacturer’s list price of the car
- CO2 emission rate of the car
- A 3% surcharge applied to diesel cars which are made available to employees
The benefit in kind can be reduced where the employee makes either:
- A capital contribution of up to £5,000; or
- A private use contribution which recognises the fact that the car is being made available for private use by the employee.
Many employers have started to provide their employees with electric vehicles, with the attraction being that they can be provided with a low benefit in kind charge. The benefit in kind charge for the 2022/23 tax year, for which forms P11D are due to be completed, ranges between 2% and 15%, compared with fossil fuel rates which can be as high as 37%.
A further point to bear in mind is whether the employer is providing fuel or not. As far as petrol or diesel cars are concerned, when the employer provides any fuel for private use, a benefit in kind charge will need to be reported based on the following formula:
‘Fixed figure’ x CO2 emission rate for the car.
For the 2022/23 P11D forms, the ‘fixed figure’ is £25,300.
However, electricity is not considered fuel for benefit in kind purposes, which is a further reason why the use of an electric car is proving to be a more attractive proposition.
Employer provided loans (including overdrawn director’s loan accounts)
Employers can provide an employee or director with a loan (including a loan facility) of up to £10,000 before any benefit in charge will arise.
For cases where loans more than the £10,000 limit are made available, a benefit in kind charge is calculated by taking the outstanding loan balance, multiplied by the official rate of interest, less any interest paid by the employee. However, the approach which is more commonly applied is to calculate the charge based on an average of the loan over the course of the tax year.
Please note that where a loan is written-off, the full amount will be taxable but also liable to Class 1 NI, which will apply to both the employer and employee.
Class 1A NI liability
Owing to the various changes to the NI rates, charged during the 2022/23 tax year following the introduction and subsequent cancellation of the Health and Social Care Levy, an ‘averaged’ rate of 14.53% will be applied when calculating the Class 1A NI charge due, in respect of the benefits which are reported on forms P11D.
The liability is due for payment by 19 July 2023, which is extended to 21 July where payment is made via BACS.
PAYE settlement agreements
Employers commonly use PAYE Settlement Agreements (PSA) to help manage the reporting and payment of Income Tax and NI on benefits or taxable benefits where it would be ‘unpopular’ for the liabilities be passed on to the employees.
Items which can be included within a PSA must satisfy one of the following conditions:
- It is minor in nature
- It is incurred on an irregular basis
- It is difficult to allocate the cost to individual employees
Common examples of the type of benefits which are included with a PSA include:
- Staff entertaining
- Relocation expenses
- Staff awards
A PSA is an agreement between the employer and HMRC, and needs to be in place by 5 April in the year in which the benefit is first provided. Enduring agreements are now used, thereby removing the need for it to be re-issued annually. However, it is good practice to review any agreement to ensure it is up to date and, where any changes are required, the employer must contact HMRC before the end of the tax year.
HMRC expects the employer to submit the Income Tax and NI calculations, which are prepared on a grossed-up basis by 31 July following the end of the tax year. The liabilities are due for payment by 19 October 2023.
Redundancy and termination payment reporting
Employers are required to report to HMRC by 6 July, following the end of the tax year, with details of any termination payments, including the on-going provision of any benefits, where the total cost exceeds £30,000.
The information employers are required to provide includes:
- The total amount of the payments and other benefits awarded.
- The total amount of the payments made in the year in connection with the award.
- Details of the non-cash benefits provided in that year in connection with the award.
- The total number of years in which payments and non-cash payments are to be provided in connection with the award.
- An estimated total amount of the payments to be made in subsequent years in connection with the award.
- A description of each of the other benefits to be provided in subsequent tax years in connection with the award and the basis upon which it is being provided.
If employers need to file a report based on the above, it should be submitted to PT Operations Northeast England, HM Revenue & Customs, BX9 1BX.
For further guidance on any of the above, get in touch with our Employment Taxes team.