PAS Notes

Graham Whitehouse

PAS Ltd’s response to HM Treasury’s paper on Integrating the operation of income tax and National Insurance contributions

By Graham Whitehouse | 20 September 11 | In: General News

HM Revenue & Customs

Our response concentrates on the very confusing National Insurance rules that surround benefits-in-kind reporting.

Consultation Document >

Taxable expenses and cash equivalents of benefits-in-kind have to be reported on end of year forms P11D (& P9D for lower paid employees). Benefits-in-kind reported on a P11D form are subjected to Class 1A National Insurance that is set at the same rate as the Employers’ secondary Class 1 rate for any given year. The amount of Class 1A NIC due has to be calculated and returned on the annual Employer’s declaration P11D form and payment is due approximately three months after the end of the tax year.

Vouchers, bills paid and taxable expenses (including excess mileage allowances above the approved rates) are reportable on both the P11D and the P9D for tax purposes. The rules state that these are to be included in the payroll in the relevant earnings period that they are made available to the employee for the deduction of Class 1 NIC (both employees and employers contributions due).

These rules place a significant administrative burden on employers. Because these rules are so confusing, it is no surprise that there are a substantial number of employers who fail to follow these procedures correctly. They either: -

  • Fail to put the taxable expense through the payroll for Class 1 NIC at all.
  • Fail to put the taxable expense through the payroll for Class 1 NIC in the correct earnings period.
  • Attempt to incorrectly pay Class 1A NIC on these items by making adjustments to the back of the P11D form.

Also it has recently become quite prevalent amongst certain larger employers to payroll simple benefits-in-kind such as medical insurance. The main driver for this appears to be to save paperwork at the end of the tax year by not having to complete P11Ds. Most often monthly figures for notional pay relating to an employee’s medical insurance are subjected to tax through the payroll and some employers even go so far as to subject these payments to Class 1 NIC as well.

However the correct procedure to follow if such payments are payrolled for tax purposes is to make a manual adjustment for Class 1A NIC on the P11D form at the end of the year. HMRC have also recently insisted that payrolled benefits have to appear on the P11D form showing a taxable amount of nil. This eliminates one of the main advantages of payrolling benefits i.e. to cut down on end of year paperwork.

It would be far simpler and less confusing if a simple rule of thumb was adopted. That is if an amount relating to a benefit-in-kind or a taxable expense is put through the payroll, it should be taxed and subjected to Class 1 NIC with no further end of year reporting required. Otherwise if such items are reported on the end of year P11D they should all be included as NICable on the P11D form for the purposes of calculating the Class 1A NIC due.

This approach will significantly simplify the current rules and should result in an overall increase in the National Insurance yield.