Helping to pay an employee's tax
SJ writes: My sales manager has just received a large tax bill arising on a company-car benefit he had in a previous job. We do not provide a company car. He is valuable to the business, so I would like to help him pay it. Can the company pay his tax without incurring further tax liabilities?
Your employee’s liability should have been deducted from his previous employer’s payroll had Revenue and Customs been notified at the time the car was made available to him,writes Jon Sutcliffe, partner at Kingston Smith LLP.
Where the Revenue was not notified at the right time, then a large tax bill can build up, and will generally crystallise when the January 31 personal-tax deadline arrives as the residual liability is also due then. You are obviously aware that you have no obligation to help your sales manager, but have chosen to do so because of the value of his contribution to your business.
You could choose to pay the liability either with or without reimbursement from the sales manager, but the tax treatment will be different.
Where the amount is treated as a loan that he will have to repay, but for which no interest will be charged, then a benefit in kind will arise on a notional interest charge, where the total of loans made to him exceeds £5,000.
This is reported to the Revenue on his P11D, which is prepared by employers each tax year. You can avoid the reporting requirements if he is charged interest at the “official rate”, which is currently 6.25%, but will be reduced to 4.75% as from March 1.
If you are not expecting reimbursement from your sales manager, then the amounts will need to be grossed up and put through the payroll.
This will significantly increase the costs to you as the employer.
It will be worth checking that his tax code does not still assume he has a company car. If so, he may have overpaid tax in the current year and is probably due a refund once it has been corrected.