Payrolling is a process by which you can easily deduct & pay tax on employee’s expenses & benefits through your payroll.
In case of any change such as change in company car or employee leaving & changing the organization, you need to recalculate the taxable amount to go through your payroll.
Every employee benefit normally ends on his or her last working day in the organization. In order to calculate the taxable benefits to payroll in employee’s remaining paydays,follow the steps given below –
- Calculate the revised taxable amount for the day’s benefits accessed by an employee in a relevant tax year.
- Take away the amount pay rolled for the tax year to date.
- Payroll the remaining amount over the remaining pay days.
Remaining amount cannot be pay rolled in case employee is getting his or her final pay. In such cases, you must tell HMRC to collect the tax from the employee directly.
Employee keeps their benefit up to the end of the Tax Year
Employer has the authority to let employee keep the benefit up to the end of the year even after leaving the organization.
Take the payroll amount of the paydays less the taxable amount for the entire year. It gives you the amount still remaining to be taxed. You need to add this amount to any remaining wage payments.
In case employee already completed his or her last day in the organization, kindly tell HMRC to collect the owed tax from the employee.
Example: Employee gives notice in December that their last day is 28 February
Employee provides resignation letter in December and informed his or her employer that his last day in the organization is 28th February.
The employee has a company car. The taxable amount is £6400 i.e. £17.53 a day (£6400/365)
As employee worked only till 28th February, the revised taxable amount will be 329 * 17.53 = £5767.37
£533.33 (£6400/12) was pay rolled each month. £533.33 * 9 paydays so far =£4799.97 pay rolled to date.
£5767.37 – £4799.97 = £967.40
The balance of £967.40 should be pay rolled over the remaining 2 pay days – £483.70 each pay day.
Value of an Employee’s benefit changes
Sometimes value of an employee’s benefit changes such as change in medical insurance premium, new company car is provided or any additional payment is done via company credit card.
You need to calculate the revised taxable amount to payroll. In order to calculate it, follow the steps given below –
- Find out the taxable amount up to that date before the value changed.
- Add the old taxable amount to the new taxable amount from the date value changed to the end of the tax year
- Take away the pay rolled amount to date in the tax year
Note – In case you have submitted your final full payment submission (FPS) you can carry forward the amount to the next tax year.
Example: Employee gets a new Company Car on 1 August
Suppose an employee get a new car from the company on 1st August. The original taxable amount was £5800. It will be £15.89 a day (£5800/365). There are 117 days left for 31st July before the value changes.
117 * £15.89 = £1859.13 taxable amount before the change.
The non-taxable amount is £7000. It will be £19.17 a day (£7000/365)
There are only 248 days left in the tax year. 248 * £19.17 = £4754.16 taxable amount from the date of the change.
The total taxable amount over the whole year is £6613.29 (£1859.13 + £4754.16)
£483.33 was pay rolled each month £5800/2. £483.33 * 4 pays so far = £1933.33 pay rolled to date.
Total taxable amount = £6613.2 – £1933.33 = £4679.87
This should be pay rolled over the remaining 8 pays = 4679.87/8 = £584.98 a month.
Correcting the Taxable Amount
In case you calculate the wrong taxable amount, you need to calculate the amount again to payroll. In order to calculate it, follow the steps given below –
- Calculate the correct taxable amount for the full tax year.
- Take away the pay rolled amount to data in the tax year.
- Lastly, payroll the remaining amount over the remaining pay days.
Note – In case you have submitted your final full payment submission (FPS), you can carry forward the amount to the next tax year.
Example – Mistake with Company Car Value
The original taxable amount was £5800. The employer realizes after 4 months that the correct value is £7000.
£5800/12 = £483.33
£483.33 was pay rolled each month.
£483.33*4 paydays so far = £1933.33
£7000 – £1933.33 = £5066.67
You need to payroll the balance of £5066.67 over the remaining 8 pay days i.e. £5066.67/8 = £633.33
Changing the Number of Paydays
There might be a change in number of pay days because of change in pay terms such as weekly to monthly pay. In order to recalculate the amount to payroll, you need to follow the steps given below –
- Calculate the taxable amount of the benefit for the full tax year.
- Take away the already pay rolled amount
- Payroll the remaining amount over the remaining pay days.
Example: Employee changes from Weekly to Monthly Pay at the end of November
The employee has a company car and the taxable amount is £6000.
£6000/52 = £115.38
£115.38 was pay rolled each week.
£115.38 * 34 pay days so far = 3922.92 pay rolled to date =£6000-£3922.92 = £2077.08
This should be pay rolled from December to march over the 4 monthly pay days = £2077.08/4 = £519.27
Change means the tax payable is more than 50% of the pay
In case of recalculated benefit, the employee’s will get tax deduction of more than 50% of their pay.
Carrying forward a change to the next tax year
In case you have submitted your final full payment submission (FPS), you can carry forward the amount that hasn’t been pay rolled to the next tax year.
Add this amount to the first wage payment yet to be pay rolled in the next tax year.
In case the taxable amount has reduced, the employee needs to pay less tax or might get a refund.
In case of self-assessment, the figures reported by employee will be accepted by HMRC and agree with the employer’s action to carry forward the benefit pay rolled in the following tax year.
You can’t carry forward the class 1 national insurance contribution payable on the benefit to the next tax year. The due date for paying national insurance contribution is 19th July after the end of the tax year.
Employee has left & no further paydays to payroll the benefit
In case employee left the organization but still a part of the benefit to be taxed. HMRC will contact the employee for the unpaid tax. Therefore, choose one option among the following-
Option 1: Include the balance in your FPS
Tell HMRC that employee has left the organization (if not informed) and report the taxable amount and include the same in your FPS.
Option 2: Include the balance on form P11D
Include the untaxed balance and report to HMRC by filing form P11D for the period that the employee had the benefit which wasnot included in payroll.
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