Can you reverse payroll tax on perks?
Tax and NI on perks can be avoided by “making good”. This involves the director or employee who received the benefit reimbursing their employer for it. But are you allowed to make good a perk if PAYE tax has already been paid on it?
Making good
When a director or employee makes good a perk it reduces the tax payable. For example, if the taxable amount of a perk is £1,000 and £800 is made good, the taxable amount is reduced to £200. Tip. Making good may save company owner managers money if used as part of a tax planning strategy.
Deadlines. Until 2017 making good was trickier as the rules set different time limits for making good depending on the type of perk. This confusion was removed when the government followed a suggestion by the Office of Tax Simplification (OTS).
Simplifying making good
The rules were changed in 2017 to align all making good deadlines to the 6 July following the end of the tax year in which the perk was provided. This allowed employees and directors a fair chance of making good if they wanted to.
Note. Interest free and low interest loans (cheap loans) made to employees or directors are an exception. The making good deadline for them is 31 December.
Payrolling benefits
Also in April 2017 HMRC used its powers to create regulations that allowed employers to opt to tax perks by payrolling them. This involves the employer collecting tax on perks through the PAYE system each time they pay salary to the employee or director. HMRC doesn’t permit all benefits to be payrolled; employer-provided accommodation and cheap rate loans are excluded. Frustratingly, if an employer opts to payroll benefits HMRC’s regulations override the making good deadline that the OTS and the government went to the trouble of simplifying.
Alternative making good deadlines
HMRC’s payrolling regulations reinstate and in some ways make worse the making good muddle that existed before simplification. The making good deadlines for perks are now:
- for non-payrolled perks, 6 July (31 December for cheap interest loans)
- for payrolled benefits: the employee’s last payday in the tax year in which the perk is provided unless the perk is fuel for private journeys in an employer-provided car or van, or a credit voucher, e.g. private purchases made on the business’s credit card, in which case the deadline is 31 May.
If an employer wants to give an employee or director the best chance to make good a perk, the solution is simply not to payroll benefits. However, trouble is looming. In January 2024 HMRC announced that payrolling of benefits will be mandatory from April 2026. The effect of this on making good will be to permanently undo the efforts of the OTS. The only glimmer of light indicating that common sense might prevail is that HMRC will consult the tax industry about the proposed change before it takes effect.
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