Dodging the dreaded annual P11D routine

Tax on benefits is changing

As you’re probably aware, HMRC is changing how employers report the benefits in kind they provide to their employees and directors. From April 2027 employers must “payroll” benefits, which involves including them as part the taxable salary on which PAYE tax is due when the employee/director is paid. Payrolling will negate the annual chore of completing P11Ds but in the meantime it’s business as usual unless the benefits are “made good”.

Benefits do not need to be reported on Form P11D if they are “made good”.

What is “making good”?

This involves the employee/director paying an amount to their employer that equals the value of the benefit in kind. The making good must happen no later than the deadline for submitting P11Ds to HMRC. For benefits in kind occurring in 2024/25 the deadline is 6 July 2025.

Although as an employee there’s no financial advantage to making good a benefit, there can be for directors who have a significant shareholding in their company. This means there’s a double advantage, less paperwork for the employer and less tax and NI for the director and their company combined.

Making good the right way

Apart from meeting the 6 July deadline, making good a benefit in kind efficiently for tax and NI purposes is best achieved by the company declaring a dividend sufficient to cancel out the taxable amount of the benefit.

Example. In June 2024 Acom contracted with a builder to repaint the MD’s home. The cost of the work was £5,000, which Acom paid. This is a benefit in kind for tax and NI purposes and Acom would usually need to report this to HMRC on Form P11D by 6 July 2025. However, after advice from Acom’s accountant the MD decides to make good the benefit.

The process of making good simply involves Acom declaring an interim dividend of at least £5,000 for the MD (other shareholders with the same class of shares will also be entitled to a dividend) and netting it off against the cost of the benefit in its books. The result of this is that the MD doesn’t receive any money for the dividend (because Acom has retained it) but avoids tax on the benefit, without any cash going out of the company.

Tax deferral

There’s also a cash-flow advantage to making good. The benefit in kind not made good would be taxable for 2024/25 meaning Acom would be liable to pay Class 1A NI at 13.8% of £5,000 by 19 July 2025 and in our example the MD, a higher rate taxpayer, would have to pay £2,000 tax (£4,000 x 40%) by 31 January 2026.

By making good the benefit with a dividend credited in Acom’s books no later than 6 July 2025 it won’t be liable to pay Class 1A NI. Also, the director’s tax bill is reduced slightly to £1,687 (£5,000 x 33.75%) which won’t be payable until 31 January 2027.