While reviewing figures for your P11Dreturns for 2022/23, your bookkeeper has observed that PAYE tax and NI were not deducted from expenses that are not covered by the general exemption. At this point, you may be wondering how to rectify this issue. Rest assured, there are steps you can take to address the problem effectively.
Since 2016, the responsibility of determining an employee's eligibility for a tax deduction for job expenses now lies with employers. There are three possible actions to consider:
● Expenses that qualify for a tax deduction are exempt from income tax and NI, and reporting them on a P11D or taking further action is unnecessary.
● Expenses paid for an employee(excluding payments made directly to the employee), such as a hotel bill, that are not tax deductible must be reported on a P11D, including the payment of Class 1A NI contributions for most expenses.
● In case you reimburse an expense to an employee that is not tax deductible, you should treat it as taxable pay, deduct PAYE tax and Class 1 NI, account for employers' Class 1 NI, and report the payment on Form P11D (usually under section N).
Tip: If you're unsure about the expense category, refer to the instructions above. Even if it turns out you made a mistake, HMRC cannot penalize you as long as you have duly considered the tax deduction rules.
Trap: If, in the third situation, you overlooked deducting PAYE tax and NI and now recognize your mistake, you must promptly rectify the error. As the employer, you are responsible for any shortfall in PAYE tax and NI payments.
If you spot any mistakes for a previous tax year, it's crucial to act promptly. Submit a corrected full payment submission with the accurate pay, tax, and NI figures for each affected period. Also, make sure to pay any additional tax and NI resulting from the corrections.
Trap: The NI rate has changed starting from November 6, 2022. Ensure that you use the appropriate rate based on the date when the reimbursed expenses were supposed to be included in your employee's salary.
Once you've settled the additional tax and NI owed to HMRC due to the error, you'll be at a financial loss. However, you have the right to reclaim the PAYE tax and employees' NI contributions from the employee (excluding employers' NI). Regardless of the amount you need to recover, it's recommended to communicate the situation to the employee before requesting payment.
Tip: When dealing with a mistake, be fair and reasonable to employees. For instance, if a significant amount is involved, consider spreading the repayment over multiple pay periods. Once terms are agreed, simplify the collection process by having the payroll manager deduct the owed amount post-tax and NI from the employee's salary.
Once an error is detected, promptly send a corrected full payment submission to HMRC for each pay period with the error. Pay the additional tax and NI simultaneously, then consult the employee before deducting what they owe from their salary.
Managing employee expenses can be challenging and expensive, but with proper planning, it doesn't have to be. At Elena Meskhi & Co, we proudly assist business accounting to not let costly mistakes bring your business down. Discover how our services can make a difference. Start by booking a call with our CEO, Elena Meskhi, today. Together, let's improve efficiency and save money on your employees' spending.
