There’s no doubt about it—payroll is complicated. One of the common hurdles businesses face is understanding how payroll exemption works in the UK.
Essentially, payroll exemption applies to specific instances where employers aren’t required to include certain forms of payment or benefits when calculating the payroll taxes they owe on behalf of their employees.
These exemptions can help businesses cost-save, as they help reduce the amount of National Insurance Contributions (NICs) and income tax paid through the PAYE (Pay As You Earn) system.
Getting to grips with payroll exemptions can save businesses like yours money and resources. As you refine your payroll management processes–often with the help of nifty payroll software–understanding payroll exemptions can stop you from overpaying taxes.
In this guide, we’ll take a look at payroll exemption in the UK: how does it work?
Understanding Payroll Exemption
In the UK, payroll exemption is a set of rules determined by HMRC allowing specific payments or benefits to be excluded from payroll tax calculations. However, there’s a tight criteria for the exemption to apply.
Payroll exemptions are only available if the payment or benefit meets the strict rules set out by HMRC. Understanding payroll exemption rules can help employers and HR functions save money–when exemptions are applied correctly, it means you’re not overpaying your payroll taxes.
Types of Payroll Exemptions
HMRC has produced a definitive guide to payroll exemption, which you might find enlightening. We’ve compiled the basics here so you can better understand who qualifies and under what conditions.
Mileage Allowance Payments
Employees using their personal vehicles for work could be entitled to mileage allowance payments. If they don’t exceed the approved mileage allowance rates set by HMRC, these payments are exempt from tax.
The mileage rate for cars and vans is 45p per mile for the first 10,000 miles and 25p per mile thereafter, unchanged from 2023. This exemption helps cover fuel and wear and tear costs.
Trivial Benefits
A trivial benefit is a small benefit provided to employees that doesn’t exceed £50. This could be the provision of tea, coffee and biscuits in the office or seasonal gifts, like a bottle of wine or a box of chocolate. It might also cover the cost of repairing a bike used to cycle to work. HMRC has quite strict rules on what qualifies here (two bottles of wine might be a bridge too far, for instance), so it’s worth checking out the HMRC criteria here before ordering in the Christmas hampers.
Trivial benefits are exempt from tax and National Insurance contributions if they meet the following conditions:
- The cost does not exceed £50.
- It is not cash or a cash voucher.
- It is not a reward for work or performance.
- It is not in the terms of the employee’s contract.
Essentially, the trivial benefit cannot be perceived or offered as a payment in kind and should be infrequent or ‘one-off’ in nature.
Work-Related Training
Employers can also provide their employees with work-related training without taxing these benefits. This includes upskilling courses, professional seminars, and online training courses. But here’s the rub: it has to be directly related to the employee’s job. This exemption only applies as long as the training is designed to improve skills or knowledge related to the employees’ function (for example, a yoga class wouldn’t be considered valid in this case).
The Application Process
Certain steps must be taken before applying for payroll exemption. First, ensure your payment or benefit actually qualifies for an exemption (if in doubt, contact your accountant or payroll department for advice, as this could cause a headache later on).
Keep detailed records of your exemption and provide documentation. For example, employers should keep an updated log of business miles driven by employees for mileage allowance payments. For trivial benefits, receipts and records of the cost should be updated regularly and stored safely.
Communicate with your payroll software provider or accountant to make sure your exemptions are applied correctly–or even classified as exemptions. In some cases, you might need to contact HMRC and provide additional evidence to support your claim for an exemption.
Benefits of Payroll Exemption
Whether you’re a large enterprise or a small boutique, payroll exemption can offer huge savings for employers and employees. Employers can save on reduced National Insurance contributions, while employees save on income tax. This can boost your bottom line and minimise the employment costs related to payroll.
The most obvious benefit for employees is the reduction in taxable income. For example, if an employee earns £50,000 annually and has a £2,000 payroll exemption, they are only taxed on £48,000 of income. Since less tax is being deducted, employees may see an increase in their take-home pay.
Employers can streamline their payroll processes by reducing the number of taxable benefits and payments, reducing the admin burdens, and lessening the chances of mistakes. Payroll exemptions improve the accuracy of tax deductions overall, reducing the likelihood of errors and disputes with HMRC.
Providing tax-free benefits is also a huge boon for employee satisfaction. Small gestures like Christmas presents are obviously appreciated by staff. Employees also appreciate benefits that aren’t subject to tax out of their own pocket (like petrol costs/mileage allowance), which can optimise their compensation package without adding any additional costs to the employer.
Common Pitfalls and How to Avoid Them
Unsurprisingly, one of the most common mistakes employers make is misunderstanding the various criteria for an exemption. Take time to familiarise yourself with HMRC’s guidelines, and if in doubt, seek advice from payroll experts.
Companies also fail to keep definitive and accurate records, which can cause problems with HMRC. Always maintain detailed records for all payroll exemptions and benefits. This includes fuel receipts, travel logs, and purchase receipts.
Payroll data kept and processed on spreadsheets can often go missing or be difficult to access. Failing to produce source payroll data can result in huge delays in accounts getting signed off. To avoid this, have a data backup strategy ready.
Another common pitfall is keeping personal data secure. Your recordkeeping should be fully compliant with GDPR and protected against data breaches. Payroll software that uses a cloud-based solution can help you store data securely and effectively.
Payroll exemption rules can change. HMRC update their guidelines each year, and it’s an employer's responsibility to stay updated with any changes in legislation. That ensures you’re applying exemptions correctly and keeps you safe from non-compliance. Education always helps: schedule training for any staff who deal with payroll and pay attention to news and updates from your payroll provider.
Case Studies
To effectively manage payroll exemption, you need a reliable payroll software. Many businesses choose to outsource their payroll function entirely.
ArcelorMittal, the world’s leading steel and mining company, partnered with ADP to ensure that payroll continued seamlessly and without delay during a time of great uncertainty.
They used ADP’s iHCM, a simple and scalable solution for unifying payroll across multiple countries. This solution integrates seamlessly with a host of popular legacy business applications and leading payroll, HR, and financial systems.
Following the implementation, ADP is now responsible for delivering all ArcelorMittal’s payroll checks–including payroll exemption, maintaining tax law compliance, recording new hires, and editing employee records.
ADP has quickly become a key partner and solution for ArcelorMittal: “There is nothing not to like. ADP makes our lives easier and eliminates mistakes. We haven’t had an issue with our payroll in over three years since working with ADP. The team couldn’t be more accommodating.”
Conclusion
Payroll exemptions should be part of every company’s payroll strategy. They bring huge cost-saving benefits for both employers and employees. Plus, they’re an opportunity to optimise your payroll system to work like a well-oiled machine.
To recap, it’s important that you stay up to date with the complex and ever-changing criteria for payroll exemption. Familiarise yourself with the application processes. Schedule regular reviews of your payroll practices and keep records and receipts securely. Ask for help from payroll experts to ensure you’re fully compliant and maximising the advantages of payroll exemption.
For a seamless payroll experience, consider ADP’s payroll software. Trusted by PayPal, Amazon, and Cisco, ADP provides innovative payroll software that streamlines the grunt work for you. Their outsourced function goes one further: eliminating the cost and manual errors of in-house payroll (with years of expertise in identifying and processing payroll exemptions).
By understanding and applying payroll exemptions, businesses like yours can save money, simplify payroll management, and improve employee satisfaction all in one go.
Here’s some helpful FAQs related to payroll exemption in the UK.
FAQs
What is a payroll exemption?
A payroll exemption is a situation where certain payments or benefits are excluded from payroll tax calculations, reducing the amount of National Insurance contributions and income tax owed.
How can I qualify for a payroll exemption?
To qualify, the payment or benefit needs to meet very specific criteria set out by HMRC. This includes conditions related to the type, amount, and purpose of the payment or benefit.
What are some common types of payroll exemptions?
Common types include mileage allowance payments, trivial benefits, work-related training, and childcare vouchers.
What documentation is needed for payroll exemptions?
Documentation varies by exemption type but generally includes receipts, logs, and records of the cost and purpose of the payment or benefit.
How can payroll exemptions benefit my business?
Payroll exemptions can lead to financial savings, simplified payroll management, and increased employee satisfaction.
How do I apply for a payroll exemption?
Employers need to ensure the payment or benefit qualifies, maintain detailed records, and communicate with their payroll provider or accountant to apply the exemption correctly.
Can payroll exemption rules change?
Yes, payroll exemption rules can change. Employers should stay updated on legislation changes to ensure ongoing compliance.