How benefits and expenses are taxed
First published 24 January 2019 • Updated 24 January 2019
If you provide benefits and/or expenses to your employees, remember that these too are subject to tax. You therefore need to keep careful track of employee expenses and benefits for tax purposes and inform HMRC, either using form P11D or via your payroll.
Why do I need to keep track of employee benefits and expenses?
A fundamental part of bookkeeping is maintaining a record of all the expenses and benefits you provide to your employees (and their families or households). You will need to send this information to HMRC at the end of every tax year. In addition, HMRC could ask to see evidence of your record keeping.
HMRC needs to know this information in order to calculate your employer’s National Insurance (NI) contributions. Usually you’ll need to pay Class 1A NI contributions on the majority of benefits you give to your employees. You may also need to pay tax on employee benefits.
What is a P11D form?
The form you use to submit your end-of-year declaration of employee expenses and benefits is called P11D. You’ll need to submit a P11D form to HMRC for every employee to whom you’ve provided benefits or expenses.
If you send HMRC one or more P11D forms, you also need to submit a P11D(b) form. This enables them to see how much you’ll pay in Class 1A NI on the benefits and expenses you’ve provided to your employees.
What needs to be included on a P11D form?
A wide range of benefits and expenses are included, such as company cars, private medical insurance and even some Christmas gifts. Exactly what you have to report and pay can vary depending on the type of expense/benefit.
Company cars are one example. You’ll need to report any company cars and fuel that you provide to your employees as part of a salary sacrifice arrangement. You may then need to pay NI on the calculated value of this benefit. There are tools online that help you work out what that value is.
It’s vital you keep a record of all the benefits and expenses you provide to your employees. Records should include everything from dates to any receipts related to the expense. These must be kept for three years from the end of the tax year to which they relate.
Are there any exemptions when completing the P11D form?
It’s not necessary to inform HMRC of some routine employee expenses, such as business entertainment expenses and phone bills. This rule applies as long as you’re either paying back your employee’s actual costs or paying a flat rate to your employee as part of their earnings.
When do I have to submit my P11D forms?
You must give P11D forms to HMRC by 6 July following the end of the tax year. So for example, for the tax year 2017 to 2018 the P11D forms had to be returned to HMRC by 6 July 2018.
If you don’t submit the correct forms and on time, HMRC can impose a penalty of £100 per 50 employees for each month (or part of a month) that your P11D(b) is late.
Payrolling employee benefits
An alternative to the P11D form is to register with HMRC to pay tax on employee benefits through your payroll. This way, you may be able to avoid the often time-consuming process of submitting a P11D form for each employee. However, you’ll still have to submit the P11D(b) form for the Class 1A NI contributions.
If you want to do this, tell HMRC before the start of the tax year in question.
Dealing with benefits through payroll (also known as payrolling benefits) may not be right for every business. It’s important to check that the employee benefits you offer can be payrolled. If they can’t, consider whether you want two systems (some benefits through payroll, some through P11D) or whether you would rather submit them all via P11D.
Also bear in mind that if you want to payroll benefits, you’ll need to calculate the cash equivalent of each benefit. This is probably a job for your accountant.
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