An employee recently required an operation, due to waiting times they had to go private. The employee (not a director) arranged the operation and paid some of the costs. We paid £3,000 towards the operation (directly to the hospital, we did not reimburse the employee). The contract was between the employee and the hospital.
As such my understanding is that both the employee and us will need to pay National Insurance on the £3,000 this month. Next year the £3,000 will be recorded on the employees' P11D for Income Tax purposes. Is my understanding correct?
How do you record this transaction on Xero Payroll (we do not payroll benefits)?
In this month’s draft payroll for the employee I have recorded a “lump sum” earnings amount of £3,000 (subject to National Insurance but not Income Tax) and then a negative “lump sum” earnings amount of £3,000 (not subject to Income Tax or National insurance).
This seems to calculate the correct National Insurance and net pay, but seems to be far from an elegant solution. I am also concerned that it will throw out either the monthly RTI and/or the year end P60 form. Can anybody suggest a better way to do this?
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Replies (10)
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Before deciding how to process in payroll, we (or at least I) need to understand what you think the £3,000 payment actually is?
In particular, what is the basis of your assumption that it is not taxable? And when you say it is 'subject to National Insurance' do you mean Class 1 or 1A?
Only when sure of the intended treatment of the payment can the question of how to achieve this via processing be considered.
I will try one more time ...
"We paid £3,000 towards the operation (directly to the hospital, we did not reimburse the employee). The contract was between the employee and the hospital."
So what makes you think (or what missing info is there to support) that this is a BiK?
By default, things that are paid in cash (to or on behalf of the employee) are treated as earnings - and so liable to Tax and NI in the usual way.
IF that is the case here, then your question is changed (to how to record an earnings payment such that it is processed/reported under PAYE but not paid to the employee).
Hi,
Thank you very much for taking the time to reply. Apologies for not responding sooner.
I think how the amount is treated depends very much on whether the transaction is between you and the hospital, or the hospital and the employee.
The following link seems to support this….
https://www.gov.uk/expenses-and-benefits-medical-treatment/what-to-repor...
It states:-
"Your employee arranges treatment or insurance, but you pay the provider
You must:
report it on form P11D
add the value of the benefit to the employee’s earnings when deducting and paying Class 1 National Insurance (but not PAYE tax) through payroll."
Hmmm ... you always need to read GOV.UK guidance in its entirety (and recognise that it is simplified to help in the majority of, but not all, situations).
1. The link you've provided comes from a group of 5 pages, the first of which states:
"Overview
As an employer providing medical or dental treatment or insurance to your employees, you have certain tax, National Insurance and reporting obligations.
What you need to report and pay depends on:
- the kind of treatment or insurance you provide, and
- whether you pay the provider directly."
This does not appear to be the scenario that you've described (i.e. the employer is not providing treatment or insurance, but reimbursing the employee for part of the costs the employee has incurred). So it looks like the payment is made on behalf of the employee and should be treated as her/his earnings.
2. For more detail, see https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim01550
"Circumstances: The hospital etc bills the employee for the treatment. The employer pays the hospital.
Tax treatment: The employer has discharged the employee’s debt, so the amount paid is taxable as earnings within Section 62 ITEPA 2003."
I'm sure this is not what you wanted to hear, and others on here may disagree, but I hope it helps.
Thank you again.
I have had a look at the link. The first circumstance seems to apply.
"The hospital etc bills the employee for the treatment. The employer pays the hospital."
This then links to:-
"EIM00580 - Employment income: benefits in kind treated as earnings under Section 62 ITEPA 2003: benefits of direct monetary value to the employee: employer paying employee's debt: the pecuniary liability principle"
Which in turn links to:-
"EIM00590 - Employment income: benefits in kind treated as earnings under Section 62 ITEPA 2003: the pecuniary liability principle: operation of PAYE"
This states:-
"The employer cannot operate PAYE when making a payment to a third party such as a gas company, or British Telecom. Instead, the item has to be shown on form P9D (for 2015/16 and earlier) or P11D as appropriate."
So I think the amount goes on the P11d.
The question is: who was billed? If employee, PAYE (Hugo's reference); if employer, P11d (circumstance 3, Hugo's reference).
Thank you. Employee was billed, not employer. So I think the income tax, as you point out, is collected via the P11d.
TD: "The question is: who was billed? If employee, PAYE (Hugo's reference);"
... but you now say "Employee was billed, not employer. So I think the income tax, as you point out, is collected via the P11d."
Isn't that a bit of a non sequitur?
