Annex 2 — payrolling examples for loans and accommodation (non-mandatory benefits)

9th Nov 2026

Annex 2 — payrolling examples for loans and accommodation (non-mandatory benefits)

Payrolling examples for voluntary payrolling of accommodation and loans.

Payrolling employment-related living accommodation

Currently, the cash equivalent of an employment-related living accommodation benefit is calculated retrospectively at the end of the tax year using actual obtained figures.

If employers choose to voluntary payroll this benefit, we expect the cash equivalent to be estimated at the start of the year and corrected either in-year or using the benefits in kind update process after the end of the tax year once actual figures are known.

Associated living costs, where accommodation is provided, can be estimated and corrected once actual figures are known.

Employment related living accommodation will remain voluntary to payroll from April 2028. However, separately taxable associated living costs, such as heating, lighting, maintenance, decorating and furniture, will be mandatory to payroll from April 2028.

The following examples are on the basis that the employee’s tax code is operated on a cumulative basis.

Here are some examples that illustrate how employment related living accommodation can be payrolled.

Properties under £75,000 in value

For properties valued at under £75,000, the calculation does not take into account HMRC’s official rate of interest. This rate is only used for properties valued at over £75,000.

An employer rented living accommodation for £3,000 a year that an employee occupies for the tax year at a rent of £300 a year.

At the end of the tax year, the actual cash equivalent is calculated as follows:

actual cash equivalent (£3,000 – £300) = £2,700

Voluntary payrolling requires employers to use a reasonable estimate at the start of the tax year to calculate the expected cash equivalent of the benefit.

The scenario is the same, but it is now the start of the tax year instead of the end. The employer and employee have agreed the employee will continue to occupy the accommodation (accommodation 1) for the duration of the upcoming tax year — the same living arrangements and financial arrangements are expected to continue.

At the start of the tax year, the expected cash equivalent is estimated as follows:

rent to be paid by employer = £3,000
rent to be paid by employee = £300
expected cash equivalent (£3,000 – £300) = £2,700

Once the estimated tax liability of an employer-provided living accommodation benefit is established, this could then be spread across the employee’s pay periods so that tax can be collected and Class 1A National Insurance contributions assessed by the payroll.

Continuing on from this scenario, in the time that the employee has been living at this accommodation, they have always been paid monthly. This is expected to remain the case in the upcoming tax year.

During the tax year, the expected cash equivalent can be used to enable payrolling.

taxable value to payroll per pay period = (£2,700 ÷ 12) = £225

During the tax year, a change in circumstance may result in the expected cash equivalent at the start of the year to change from the actual cash equivalent at the end of the year, causing a difference in the tax liability on the benefit.

The same employer who had been renting living accommodation for £3,000 a year also rented another living accommodation (accommodation 2) for £3,600 a year. The same employee relocated to this new accommodation from 5 October in the relevant tax year at a rent of £480 a year. Both parties agreed that the employee will continue to occupy the new accommodation for at least the duration of the tax year.

This means that the tax liability arising from accommodation 1 would be different to what was expected at the start of the tax year, as this benefit was not used for 12 months as expected.

Accommodation 1 — initial 7 months of the tax year

expected cash equivalent for 12 months = £3,000 – £300 = £2,700
apportioned for 7 months = 7 ÷ 12
actual cash equivalent = £2,700 × 7 ÷ 12 = £1,575

At the end of the tax year, the actual cash equivalent is recalculated and reconciled with the expected cash equivalent. The difference is the amount that has not yet been accounted for by the payroll. The revised taxable value of the benefit has now increased from £2,700 to £2,875.

The revised amount is reported to HMRC and HMRC will collect or repay any tax due through the End of Year Reconciliation (P800) or Simple Assessment process, or through Self Assessment if the employee is registered for Self Assessment.

Accommodation 2 — final 5 months of the tax year

rent paid by employer for 5 months = £3,600 × 5 ÷ 12 = £1,500
rent paid by employee for 5 months = £480 × 5 ÷ 12 = £200
actual cash equivalent = £1,500 – £200 = £1,300

Accommodation 1 and accommodation 2 combined — whole tax year

cash equivalent for accommodation 1 = £1,575
add cash equivalent for accommodation 2 = £1,300
total revised cash equivalent = £1,575 + £1,300 = £2,875
taxable value accounted for by payroll = £2,700
additional outstanding taxable value to be accounted for at the end of the year = £2,875 – £2,700 = £175

During the tax year, the employer can also account for a change in circumstance by revaluing the benefit in-year. The cash equivalent already payrolled would be taken into consideration and the remaining taxable value to be payrolled can be revised going forward.

The taxable value to be payrolled has increased from £225 in the first 7 months of the tax year to £260 in the final 5 months of the tax year. The revised taxable value of the benefit has now increased from £2,700 to £2,875.

Accommodation 2 — final 5 months of the tax year

rent to be paid by employer for 5 months = £3,600 × 5 ÷ 12 = £1,500
rent to be paid by employee for 5 months = £480 × 5 ÷ 12 = £200
expected cash equivalent = £1,500 – £200 = £1,300
taxable value to payroll per pay period = £1,300 ÷ 5 = £260

Accommodation 1 and accommodation 2 combined — whole 2027 to 2028 tax year

cash equivalent for accommodation 1 = £1,575
cash equivalent for accommodation 2 = £1,300
total taxable value = £1,575 + £1,300 = £2,875
taxable value accounted for by payroll = £1,575
additional outstanding taxable value to be accounted for during the year = £2,875 – £1,575 = £1,300
taxable value to payroll per pay period = £1,300 ÷ 5 = £260

Month	Taxable amount to be accounted for by payroll
1	£225
2	£225
3	£225
4	£225
5	£225
6	£225
7	£225
8	£260
9	£260
10	£260
11	£260
12	£260

Payrolling solution for accommodation for employer-owned property valued under £75,000

Currently, the cash equivalent of an employer-provided living accommodation benefit is calculated retrospectively at the end of the tax year using actual obtained figures.

An employer acquired living accommodation (accommodation 1) for £65,000 that an employee occupied at a rent of £300 a year. The gross rating value for the property is £900. No improvements were made to the property before the start of the relevant tax year.

When payrolling living accommodation, you need to use reasonable estimates to calculate the expected cash equivalent of the benefit at the start of the tax year.

At the start of the tax year

The employer and employee have agreed that the employee will continue to occupy accommodation 1 for the duration of the upcoming tax year — the same living arrangements and financial arrangements are expected to continue.

At the start of the tax year, the expected cash equivalent is estimated as follows:

total chargeable earnings = £900 – £300 = £600

In the time that the employee has been living at this accommodation, they have always been paid monthly. This is expected to remain the case in the upcoming tax year.   

During the tax year, the expected cash equivalent can be used to enable payrolling:

taxable value to payroll for each pay period = £600 ÷ 12 = £50

If circumstances change during the tax year

A change in circumstance may result in the expected cash equivalent at the start of the year deviating from the actual cash equivalent at the end of the year, causing a difference in the tax liability on the benefit.   

For example, the same employer acquired another living accommodation (accommodation 2) for £70,000. The gross rating value for the property is £1,000. The same employee relocated to accommodation 2 from 1 October at a rent of £350 a year. Both parties agreed that the employee would continue to occupy accommodation 2 for at least the remainder of the tax year.

This means that the tax liability arising from accommodation 1 would be different to what was expected at the start of the tax year, as accommodation 1 was not provided for 12 months as expected. 

As there is a change in circumstances the employer must recalculate the benefit to be payrolled.

Accommodation 1 — first 6 months of the tax year:

expected cash equivalent for 12 months = £900 – £300 = £600
apportioned for 6 months = 6 ÷ 12
actual cash equivalent = £600 × 6 ÷ 12 = £300

Accommodation 2— last 6 months of the tax year:

expected cash equivalent for 12 months = £1,000 – £350 = £650
apportioned for 6 months = 6 ÷ 12
actual cash equivalent = £650 × 6 ÷ 12 = £325

The taxable value to be payrolled has increased from £300 in the first 6 months of the tax year to £325 in the final 6 months of the tax year. The revised taxable value of the benefit has increased from £600 to £625.

In-year recalculation of the cash equivalent of the benefit

The employer can also account for a change in circumstance by revaluing the cash equivalent in-year. The cash equivalent already payrolled would be taken into consideration and the remaining taxable value to be payrolled can be revised going forward.

Accommodation 1 — first 6 months of the tax year:

expected cash equivalent for 12 months = £900 – £300 = £600
apportioned for 6 months = 6 ÷ 12
actual cash equivalent = £600 × 6 ÷ 12 = £300
taxable value to payroll per pay period = £300 ÷ 6 = £50

Accommodation 2— last 6 months of the tax year:

expected cash equivalent for 12 months = £1,000 – £350 = £650
apportioned for 6 months = 6 ÷ 12
expected cash equivalent = £650 × 6 ÷ 12 = £325
taxable value to payroll per pay period = £325 ÷ 6 = £54.16

Month	Taxable amount to be accounted for by payroll
1	£50
2	£50
3	£50
4	£50
5	£50
6	£50
7	£54.16
8	£54.16
9	£54.16
10	£54.16
11	£54.16
12	£54.16

End of year reconciliation

Accommodations 1 and 2 combined — whole tax year:

total revised cash equivalent = £300 + £325 = £625
taxable value accounted for through payroll = £600
additional outstanding taxable value to be accounted for at the end of the year = £625 – £600 = £25

If the cash equivalent of the benefit is not recalculated in year, the cash equivalent is recalculated and reconciled with the expected cash equivalent at the end of the tax year. The difference is the amount that has not yet been accounted for via the payroll. The revised taxable value of the benefit has now increased from £600 to £625. 

The revised amount is reported to HMRC. We will collect or repay any tax due through the End of Year Reconciliation (P800) or Simple Assessment process, or through Self Assessment if the employee is registered for Self Assessment.

Payrolling solution for employer-owned accommodation valued over £75,000 (cost basis)

Currently, the cash equivalent of an employer-provided living accommodation benefit is calculated retrospectively at the end of the tax year using actual obtained figures.  

An employer acquired living accommodation for £175,000 that an employee occupied at a rent of £1,250 a year. The gross rating value for the property is £1,000. No improvements were made to the property before 6 the relevant tax year.

The official rate of interest for the relevant tax year is 4%.

The calculation of the cash equivalent of the benefit for the year is:

minus employee rent = £1,000 – £1,250 = –£250
left over rent from standard value = £250
multiply by interest rate = £100,000 × 4% = £4,000
minus left over rent from standard value = £4,000 – £250 = £3,750

The standard reportable value is £0, because the rent is more than the annual rating value. This means there is no additional value to add to the total value to report.

Under mandatory payrolling, reasonable estimates are required to input into the calculation at the start of the tax year to ascertain the expected cash equivalent of the benefit.

The scenario is the same, but it is now the start of the tax year instead of the end. The employer and employee have agreed the employee will continue to occupy the accommodation for the duration of the upcoming tax year — the same living arrangements and financial arrangements are expected to continue.

At the start of the tax year, the expected cash equivalent is estimated as follows:

minus employee rent = £1,000 – £1,250 = –£250
left over rent from standard value = £250
multiply by interest rate = £100,000 × 4% = £4,000
minus left over rent from standard value = £4,000 – £250 = £3,750
total value to report (cash equivalent) = £3,750

During the tax year, the expected cash equivalent can be used for payrolling:

taxable value to payroll per pay period = £3,750 ÷ 12 = £312.50

During the tax year, a change in circumstance may result in the expected cash equivalent at the start of the year deviating from the actual cash equivalent at the end of the year, causing a difference in the tax liability on the benefit.

The same employer who had acquired living accommodation (accommodation 1) for £175,000 that an employee occupied at a rent of £1,250 a year, acquired another living accommodation (accommodation 2) for £200,000. The same employee relocated to this new accommodation from 1 October in the relevant tax year at a rent of £1,500 a year. Both parties agreed that the employee would continue to occupy the new accommodation for at least the duration of the upcoming tax year.

This means that the tax liability arising from accommodation 1 would be different to what was expected at the start of the tax year, as this benefit was not used for 12 months as expected.

Accommodation 1 — initial 6 months of the tax year

The cash equivalent is calculated as follows:

expected cash equivalent for 12 months = £3,750
apportioned for 6 months = 6 ÷ 12
actual cash equivalent = £3,750 × 6 ÷ 12 = £1,875

At the end of the tax year, the actual cash equivalent is recalculated and reconciled with the expected cash equivalent. The difference is the cash equivalent that has not yet been accounted for by the payroll. The first property had a cash equivalent of £3,750, the second property has a cash equivalent of £4,600. The revised taxable value of the benefit has now increased from £3,750 to £4,175.

The cash equivalent is calculated as follows:

minus employee rent = £1,100 – £1,500 = –£400
left over rent from standard value = £400
multiply by interest rate = £125,000 × 4% = £5,000
minus left over rent from standard value = £5,000 – £400 = £4,600
total value to report (cash equivalent) = £4,600

The standard reportable value is £0, because the rent is more than the annual rating value. This means there is no additional value to add to the total value to report.

Accommodation 2 — final 6 months of the tax year

The cash equivalent is calculated as follows:

expected cash equivalent for 12 months = £4,600
actual cash equivalent = £4,600 × 6 ÷ 12 = £2,300

Accommodation 1 and accommodation 2 combined — whole tax year

The additional outstanding taxable value is calculated as follows:

cash equivalent for accommodation 1 = £1,875
cash equivalent for accommodation 2 = £2,300
total revised cash equivalent = £1,875 + £2,300 = £4,175
taxable value accounted for by payroll = £3,750
additional outstanding taxable value to be accounted for at the end of the year = £4,175 – £3,750 = £425

During the tax year, the employer can also account for a change in circumstance by revaluing the benefit in-year. The tax already paid through the payroll would be taken into consideration and the remaining taxable value to be payrolled can be revised going forward.

If a change to the cash equivalent occurs in year, the employer must work out the revised taxable amount (the cash equivalent or relevant amount) to payroll for the remaining pay periods for that tax year. Employers will need to identify what has been payrolled so far and deduct this from the revised taxable amount. The balance should be divided equally and added to the employee’s earnings across the rest of the tax year.

In this case, the taxable value to be payrolled has increased from £1,875 in the first 6 months of the tax year to £2,300 in the final 6 months of the tax year. The revised taxable value of the benefit has increased from £3,750 to £4,175.

Accommodation 2 — final 6 months of the tax year

The taxable value to payroll per pay period is calculated as follows:

expected cash equivalent for 12 months = £4,600
apportioned for 6 months = 6 ÷ 12
expected cash equivalent = £4,600 × 6 ÷ 12 = £2,300
taxable value to payroll per pay period = £2,300 ÷ 6 = £383.33

Accommodation 1 and accommodation 2 combined — whole tax year

The taxable value to be accounted for at the end of the year is calculated as follows:

cash equivalent for accommodation 1 = £1,875
cash equivalent for accommodation 2 = £2,300
total revised cash equivalent = £,1875 + £2,300 = £4,175
taxable value accounted for by payroll = £1,875
additional outstanding taxable value to be accounted for at the end of the year = £4,175 – £1,875 = £2,300
taxable value to payroll per pay period = £2,300 ÷ 6 = £383.33

Month	Taxable amount to be accounted for by payroll
1	£312.50
2	£312.50
3	£312.50
4	£312.50
5	£312.50
6	£312.50
7	£383.33
8	£383.33
9	£383.33
10	£383.33
11	£383.33
12	£383.33

Payrolling solution for employer-owned accommodation valued over £75,000 (market value basis)

Currently, the cash equivalent of an employer-provided living accommodation benefit is calculated retrospectively at the end of the tax year using actual obtained figures.

A house that had been owned by the employer since 1972 was first occupied by a particular employee on 6 April 1998 when the market value of the employer’s interest was £130,000. It cost the employer £60,000 in 1972 and an extension was built in 1981 at a cost of £18,000.

The employee pays rent of £1,000 per annum for it and the official rate of interest is 5%. The gross rating value is £800.

The calculation of the cash equivalent of the benefit for the year is:

minus employee rent = £800 – £1,000 = –£200
left over rent from standard value = £200
multiplied by interest rate = £55,000 × 5% = £2,750
minus left over rent from standard value = £2,750 – £200 = £2,550

The standard reportable value is £0, because the rent is more than the annual rating value. This means there is no additional value to add to the total value to report.

Note that the cost of providing the accommodation is its market value as at 6 April 1998. This is because the:

total cost of the property at 6 April 1998 (including the extension) exceeded £75,000
employee first occupied it after 30 March 1983
employer had owned it for at least 6 years by 6 April 1998, the date of the employee’s first occupation of it

The improvements costing £18,000 are not included in the calculation of the chargeable benefit as they were incurred before the employee occupied the property.

The proposed solution would involve agreement between the employer and employee to provide reasonable estimates to input into the calculation at the start of the tax year to ascertain the expected cash equivalent of the benefit.

At the start of the tax year, the expected cash equivalent is estimated as follows:

minus employee rent (£800 – £1,000) = –£200
left over rent from standard value = £200
multiplied by interest rate = £55,000 × 5% = £2,750
minus left over rent from standard value = £2,750 – £200 = £2,550

During the tax year, the expected cash equivalent can be used to enable payrolling:

taxable value to payroll per pay period = £2,550 ÷ 12 = £212.50

During the tax year, a change in circumstance may result in the expected cash equivalent at the start of the year to deviate from the actual cash equivalent at the end of the year, causing a difference in the tax liability on the benefit.

The same employer who had acquired living accommodation (accommodation 1) for £130,000 that an employee occupied at a rent of £1,000 a year, acquired another living accommodation (accommodation 2) for £150,000. The gross rating value is £900.

The same employee relocated to this new accommodation from 1 October in the relevant tax year at a rent of £1,200 a year. Both parties agreed that the employee would continue to occupy the new accommodation for at least the duration of the upcoming tax year.

This means that the tax liability arising from accommodation 1 would be different to what was expected at the start of the tax year, as this benefit was not used for 12 months as expected.

Accommodation 1 — initial 6 months of the tax year

The cash equivalent is calculated as follows:

expected cash equivalent for 12 months = £2,550
apportioned for 6 months = 6 ÷ 12
actual cash equivalent = £2,550 × 6 ÷ 12 = £1,275

At the end of the tax year, the actual cash equivalent is recalculated and reconciled with the expected cash equivalent. The difference is the cash equivalent not yet been accounted for by the payroll. The first property had a cash equivalent of £2,550, the second property has a cash equivalent of £3,450. The revised taxable value of the benefit has now increased from £2,550 to £3,000.

The total value to report is calculated as follows:

minus employee rent = £900 – £1,200 = –£300
left over rent from standard value = £300
multiplied by interest rate = £75,000 × 5% = £3,750
minus left over rent from standard value = £3,750 – £300 = £3,450

The standard reportable value is £0, because the rent is more than the annual rating value. This means there is no additional value to add to the total value to report.

Accommodation 2 — final 6 months of the tax year

The additional outstanding taxable value to be accounted for at the end of the year is calculated as follows:

expected cash equivalent for 12 months = £3,450
apportioned for 6 months = 6 ÷ 12
actual cash equivalent = £3,450 × 6 ÷ 12 = £1,725

Accommodation 1 and accommodation 2 combined — whole tax year

The additional outstanding taxable value to be accounted for at the end of the year is calculated as follows:

cash equivalent for accommodation 1 = £1,275
cash equivalent for accommodation 2 = £1,725
total revised cash equivalent = £1,275 + £1,725 = £3,000
taxable value accounted for by payroll = £2,550
additional outstanding taxable value to be accounted for at the end of the year = £3,000 – £2,500 = £450

The taxable value to be payrolled has increased from £1,275 in the first 6 months of the tax year to £1,725 in the final 6 months of the tax year. The revised taxable value of the benefit has increased from £2,550 to £3,000.

Accommodation 2 — final 6 months of the tax year

The taxable value to payroll per pay period is calculated as follows:

expected cash equivalent for 12 months = £3,450
apportioned for 6 months = 6 ÷ 12
expected cash equivalent £= 3,450 × 6 ÷ 12) = £1,725
taxable value to payroll per pay period = £1,725 ÷ 6 = £287.50

Accommodation 1 and accommodation 2 combined — whole tax year

The taxable value to payroll per pay period is calculated as follows:

cash equivalent for accommodation 1 = £1,275
cash equivalent for accommodation 2 = £1,725
total revised cash equivalent = £1,275 + £1,725 = £3,000
taxable value accounted for by payroll = £2,550
additional outstanding taxable value to be accounted for at the end of the year = £3000 – £1,275 = £1,725
taxable value to payroll per pay period = £1,725 ÷ 6 = £287.50

Month	Taxable amount to be accounted for by payroll
1	£212.50
2	£212.50
3	£212.50
4	£212.50
5	£212.50
6	£212.50
7	£287.50
8	£287.50
9	£287.50
10	£287.50
11	£287.50
12	£287.50

Voluntary payrolling of employment-related beneficial loans

Payrolling the cash equivalent and expected cash equivalent of a loan

Where a correction is made in-year, payroll software will calculate the tax due using the employee’s tax code and the payroll information and assess Class 1A National Insurance contributions available for the relevant pay period.

Here are some examples that illustrate how employment related loans can be payrolled.

Cash equivalent calculation of an employer related beneficial loan

On 1 July an employer lent £15,300 to an employee. The loan was in existence for 9 complete months of the tax year and the employee had no other loans with the employer. The employee was paid monthly.

Interest was charged monthly on the balance of the outstanding loan at an annual rate of 4% (APR), compounding monthly. Repayments consisting of £135 capital plus the monthly interest were deducted monthly from the employee’s salary, which was paid on the last day of each month.

By the end of the tax year (as at 31 March), the outstanding balance was £14,085 and they had paid interest of £362.44. The official rate of interest (ORI) for the tax year was 6%.

At the end of the tax year, the actual cash equivalent is calculated as follows:

balance at start of loan = £15,300
actual balance of loan at end of tax year = £14,085
actual average amount of loan = (£15,300 + £14,085) ÷ 2 = £14,692.50
multiplied by ORI (£14,692.50 × 6%) = £881.55
apportioned for 9 months = 9 ÷ 12
interest on loan at ORI = £881.55 × 9 ÷ 12 = £661.16
interest paid by employee = £362.44
actual cash equivalent = £661.16 – £362.44 = £298.72

On 1 July an employer lends £15,300 to an employee. The loan is expected to be in existence for 9 complete months of the tax year and the employee has no other loans with the employer. The employee is paid monthly.

Interest is to be charged monthly on the balance of the outstanding loan at an annual rate of 4% (APR), compounding monthly. It was agreed between the employer and employee at the start of the loan that repayments consisting of £135 capital plus the monthly interest would be deducted monthly from the employee’s salary, which is paid on the last day of each month.

By the end of the tax year, the outstanding balance on the loan is expected to be £14,085 and the employee is expected to have paid interest of £362.44. The ORI for the tax year is 6%.

At the start of the tax year, the expected cash equivalent is estimated as follows:

balance at start of loan = £15,300
actual balance of loan at end of tax year = £14,085
actual average amount of loan = (£15,300 + £14,085) ÷ 2 = £14,692.50
multiplied by ORI = £14,692.50 × 6% = £881.55
apportioned for 9 months = 9 ÷ 12
interest on loan at ORI = £881.55 × 9 ÷ 12 = £661.16
interest paid by employee = £362.44
actual cash equivalent = £661.16 – £362.44 = £298.72

Once the expected tax liability of an employment-related beneficial loan is established, this can be spread across the employee’s pay periods so that tax can be collected by the payroll.

Continuing on from this scenario, the loan is expected to remain in existence for 9 complete months of the tax year. The employee has always been paid monthly.

During the tax year, the expected cash equivalent can be used to enable payrolling:

expected cash equivalent = £298.72
taxable value to payroll per pay period = £298.72 ÷ 9 = £33.19

You must report and pay Class 1A National Insurance contributions on the cash equivalent of the benefit you provide for each pay period or earnings period.

If your employee is paid weekly, you should apportion the total annual value of the benefit evenly across the number of pay period or earnings periods in the tax year (for example, divide by 52).

Smaller than expected repayments

Throughout the tax year, the actual cash equivalent by the end of the year may deviate from the expected cash equivalent at the start of the year, causing a difference in the tax liability on the benefit.

During the tax year, the same employee asked if lower amounts could be deducted from his salary so that he could repay less capital on the loan. The capital repayments were reduced to £90 per month, starting with the payment on 31 October. As a result, by the end of the tax year, the outstanding balance was £14,355 rather than £14,085. The interest repayments in the tax year were £364.28 rather than £362.44.

At the end of the year, the employer should reconcile the difference in cash equivalent between the initial amount expected or estimated and the actual amount obtained. The revised amount is reported to HMRC and HMRC will collect or repay any tax due through the End of Year Reconciliation (P800) or Simple Assessment process, or through Self Assessment if the employee is registered for Self Assessment.

At the end of the tax year, the actual cash equivalent is recalculated and reconciled with the expected cash equivalent. The difference is the outstanding taxable value that has not yet been accounted for by the payroll. The revised taxable value of the benefit has now increased from £298.72 to £302.96.

The additional outstanding taxable value to be accounted for at the end of the year is calculated as follows:

balance at start of loan = £15,300
actual balance of loan at end of tax year = £14,355
actual average amount of loan = £15,300 + £14,355 ÷ 2 = £14,827.50
multiplied by ORI = £14,827.50 × 6% = £889.65
apportioned for 9 months = 9 ÷ 12
interest on loan at ORI = £889.65 × 9 ÷ 12 = £667.24
interest paid by employee = £364.28
actual cash equivalent = £667.24 – £364.28 = £302.96
expected cash equivalent = £298.72
additional outstanding taxable value to be accounted for at the end of the year = £302.96 – £298.72 = £4.24

Where there is a change in circumstances, the employer will need to recalculate the actual value of the benefit, the total taxable value that needed to be payrolled, factor in the amounts already payrolled in previous pay periods and amend the amounts that are to be payrolled for the remaining pay periods.

Continuing on from this scenario, the loan is expected to remain in existence for 9 complete months of the tax year. The employee has always been paid monthly.

As the employee decided, from 31 October, to repay the loan at a lower rate than was initially expected, the employer can revalue the benefit in-year and amend the payroll figures by factoring in the amounts already payrolled.

The new taxable value to payroll per remaining pay period is calculated as follows:

expected cash equivalent = £298.72
taxable value payrolled based on expected cash equivalent = £298.72 ÷9 = £33.19
actual cash equivalent = £302.96
number of months already payrolled = 3
total amount already payrolled = £33.19 × 3 = £99.57
actual cash equivalent minus amount already payrolled = £302.96 – £99.57 = £203.39
number of remaining pay periods = 6
new taxable value to payroll per remaining pay period = £33.90

This new taxable value can then be payrolled for the remaining 6 pay periods, arriving at the same cash equivalent as reconciling in month 12.

The employer can now input the revised monthly taxable value of £33.90 for the remaining 6 pay periods of the year to arrive at the revised total cash equivalent of £302.96.

Month	Taxable amount to be accounted for by payroll
1	Not applicable
2	Not applicable
3	Not applicable
4	£33.19
5	£33.19
6	£33.19
7	£33.90
8	£33.90
9	£33.90
10	£33.90
11	£33.90
12	£33.90

Larger than expected repayments

The employee may decide to repay some or all of the loan sooner than was initially estimated, which may lead to an overpayment of tax. During the tax year the employee decided to repay the loan in full by the end of the year. This means that at the end of the year the expected balance of the loan was £14,085, but the actual balance of the loan is £0.

The employee decides in month 5 to repay the loan in full by the end of the year. The first 4 repayments consist of £135 capital plus the monthly interest. The subsequent 5 repayments (from 30 November) consist of £2,952 capital plus the monthly interest. The expected balance of the loan at the end of the tax year was £14,085, it is now £0. The taxable value of the benefit has now decreased from £298.72 to £58.67.

The change in cash equivalent is calculated as follows:

balance of loan at start of loan = £15,300
4 months repaid at £135 = 4 × £135 = £540
5 months repaid at £2,952 = £2,952 × 5 = £14,760
total amount of capital repaid = £15,300
actual balance of loan at end of tax year (or when loan was discharged) = £15,300 – £15,300 = £0
actual average amount of loan = (£15,300 + £0) ÷ 2 = £7,650
multiplied by ORI = £7,650 × 6% = £459
apportioned for 9 months = 9 ÷ 12
interest on loan at ORI = £459 × 9 ÷ 12 = £344.25
interest paid by employee = £285.58
actual cash equivalent = £344.25 – £285.58 = £58.67
expected cash equivalent = £298.72
change in cash equivalent = £58.67 – £298.72 = –£240.05

Continuing on from this scenario, the loan is expected to remain in existence for 9 complete months of the tax year. The employee has always been paid monthly. As the employee decided to repay the loan in full the employer can revalue the benefit in-year and amend the payroll figures by factoring in the amounts already payrolled.

The actual cash equivalent minus amount already payrolled is calculated as follows:

expected cash equivalent = £298.72
taxable value payrolled based on expected cash equivalent = £298.72 ÷ 9 = £33.19
actual cash equivalent = £58.67
number of months already payrolled = 4
total amount already payrolled = 4 × £33.19 = £132.76
actual cash equivalent minus amount already payrolled = £58.67 – £132.76 = –£74.09

Month	Taxable amount to be accounted for by payroll
1	Not applicable
2	Not applicable
3	Not applicable
4	£33.19
5	£33.19
6	£33.19
7	£33.90
8	–£74.09
9	£0
10	£0
11	£0
12	£0

The employer will include the –£74.09 in the next FPS so that the tax is paid back to the employee as soon as possible. This example is on the basis that the employee’s tax code is operated on a cumulative basis.

For Class 1A National Insurance contributions, the employer can correct the value of a benefit by updating the year-to-date figure through their payroll.

Employer-provided mortgage with a fixed rate

On 5 April, an employee has an outstanding mortgage balance with their employer of £100,000. The mortgage has a fixed interest rate equivalent to 1.5% (annual), compounding monthly. The loan is in existence for the duration of the tax year and there are no other loans with the employer.

The employee made repayments of a fixed amount of £800 each month to include interest. The outstanding balance at the end of the tax year is £91,833 and the employee has paid £1,434 in interest. The Official Rate of Interest (ORI) for the tax year was 2.25% (annual).

At the end of the tax year, the actual cash equivalent is calculated as follows:

balance of loan at start of loan = £100,000
balance of loan at end of tax year = £91,833
actual average amount of loan = (£100,000 + £91,833) ÷ 2 = £95,916.50
interest on loan at ORI = £95, 916.50 × 2.25% = £2,158.12
actual cash equivalent = £2,158.12 – £1,434 = £724.12

Under mandatory payrolling, reasonable estimates are required to input into the calculation at the start of the tax year to ascertain the expected cash equivalent of the benefit.

Where the loan has a fixed rate, the employer is able to do this reasonably accurately at the start of the tax year. The cash equivalent will only change throughout the tax year if an overpayment of capital is made, or if the ORI changes mid-year.

Once the expected tax liability of an employment-related beneficial loan is established, this can be spread across the employee’s pay periods so that tax can be collected by the payroll. This employee is paid monthly.

During the tax year, the same employee made an overpayment of £5,000 on their mortgage in October. As a result, by the end of the tax year, the outstanding balance is £86,802.51 and the employee has paid £1,402.51 in interest.

At the end of the year, the employer should reconcile the difference in the initial expected or estimated cash equivalent and the actual obtained. The revised amount is reported to HMRC and HMRC will collect or repay any tax due through the End of Year Reconciliation (P800) or Simple Assessment process, or through Self Assessment if the employee is registered for Self Assessment.

The cash equivalent to be accounted for at the end of the tax year is calculated as follows:

balance of loan at start of loan = £100,000
balance of loan at end of tax year = £86,802.51
actual average amount of loan (£100,000 + £86,802.51) ÷ 2 = £93,401.25
interest on loan at ORI = £93,401.25 × 2.25% = £2,101.52
interest paid by employee = £1,402.51
actual cash equivalent = £2, 101.52 – £1,402.51 = £699.02
expected cash equivalent = £724.12
reconciliation of cash equivalent to be accounted for at the end of the tax year = –£25.10

Following on from this example, as the employee made an overpayment in October, the employer could recalculate the cash equivalent in year and amend the payroll figures in the remaining months.

The new taxable value to payroll per remaining pay period is calculated as follows:

expected cash equivalent = £724.12
taxable value payrolled based on expected cash equivalent = £724.12 ÷ 2 = £60.34
actual cash equivalent = £699.02
number of months already payrolled = 6
total amount already payrolled = 6 × £60.34 = £362.04
actual cash equivalent minus amount already payrolled = £699.02 – £362.04 = £336.98
number of remaining pay periods = 6
new taxable value to payroll per remaining pay period = £56.16

This new taxable value can then be payrolled for the remaining 6 pay periods, arriving at the same cash equivalent as reconciling in month 12.

The employer can now input the revised monthly taxable value of £56.16 for the remaining 6 pay periods of the year to arrive at the revised total cash equivalent of £699.02.

Month	Taxable amount to be accounted for by payroll
1	£60.34
2	£60.34
3	£60.34
4	£60.34
5	£60.34
6	£60.34
7	£56.16
8	£56.16
9	£56.16
10	£56.16
11	£56.16
12	£56.16

Employer-provided mortgage with variable rate

On 5 April, an employee has an outstanding mortgage balance with their employer of £100,000. The mortgage has a variable interest rate, compounding monthly. The loan is in existence for the duration of the tax year and there are no other loans with the employer.

The annualised interest rate varies throughout the tax year:

April — 1.75%
May to July — 1.5%
August — 1.25%
October — 1.2%
November — 1.2%
December — 1.5%
January — 1.75%

The employee made repayments of £800 each month to include interest. The outstanding balance at the end of the tax year is £91,766.79 and the employee has paid £1366.79 in interest. The Official Rate of Interest (ORI) for the tax year was 2.25%.

At the end of the tax year, the actual cash equivalent is calculated as follows:

balance of loan at start of loan = £100,000
balance of loan at end of tax year = £91,766.79
actual average amount of loan = (£100,000 + £91,766.79) ÷ 2 = £95,883.40
interest on loan at ORI = £95,883.40 × 2.25% = £2,157.38
interest paid by employee = £1,366.79
actual cash equivalent = £2,157.38 – £1,366.79 = £790.59
expected cash equivalent = £790.59
taxable value to payroll per pay period = £790.59 ÷ 2 = £65.88

Under mandatory payrolling, reasonable estimates are required to input into the calculation at the start of the tax year to ascertain the expected cash equivalent of the benefit.

Where there is a variable interest rate, this will be difficult to estimate accurately. The employer can make reasonable estimates and reconcile the cash equivalent of the benefit at the end of the tax year, as shown in the first part of the example on smaller than expected repayments. They can also recalculate the cash equivalent in year and amend the payroll figures in the remaining months.

Following this example, the interest rate is 1.75% (annual) in April and the employer makes a reasonable estimate that the interest rate across the tax year will average around 1.75% (annual), meaning the employer estimates the outstanding balance at the end of the tax year to be £92,073.52 and the interest paid to be £1,673.52.

The taxable value to payroll per pay period is calculated as follows:

balance of loan at start of loan = £100,000
expected balance of loan at end of tax year = £92,073.52
estimated average amount of loan = (£100,000 + £92,073.52) ÷ 2 = £96,036.76
interest on loan at ORI = £96,036.76 × 2.25% = £2,160.83
expected interest paid by employee = £1,673.52
expected cash equivalent = £2,160.83 – £1,673.52 = £487.31
taxable value to payroll per pay period = £487.31 ÷ 2 = £40.61

In April, May and June pay periods, the employer payrolls £40.61 in respect of the mortgage.

The interest rate varies in May and June (1.5% annual). In July, the employer recalculates the cash equivalent on the basis that the interest rate will remain on average 1.5% (annual) for the remainder of the tax year, meaning the employer estimates the outstanding balance at the end of the tax year to be £91,854.50 and the interest paid to be £1,454.50.

The new taxable value to payroll per remaining pay period is calculated as follows:

balance of loan at start of loan = £100,000
balance of loan at end of tax year = £91,854.50
average on loan at ORI amount of loan = (£100,000 + £91,854.50) ÷ 2 = £95,927.25
interest on loan at ORI = £95,927.25 × 2.25% = £2,158.36
interest paid by employee = £1,454.50
recalculated expected cash equivalent = £2,158.36 – £1,454.50 = £703.86
recalculated cash equivalent (July) = £703.86
number of months already payrolled = 3
total amount already payrolled = 3 x £40.61 = £121.83
recalculated cash equivalent minus amount already payrolled = £703.86 – £121.83 = £582.03
number of remaining pay periods = 9
new taxable value to payroll per remaining pay period = £64.67

From July to February, the employer payrolls £64.67 in respect of the mortgage.

In March, the employer makes a reconciliation in the final pay period. The outstanding balance at the end of the tax year is £91,766.79 and the interest paid is £1,366.79.

If the outstanding loan amount changes between March and April, then the employer can account for this after the end of the tax year by sending a Full Payment Submission showing the correct year to date amounts.

The new taxable value to payroll in final pay period is calculated as follows:

balance of loan at start of loan = £100,000
balance of loan at end of tax year = £91,766.79
average amount of loan = (£100,000 + £91,766.79) ÷ 2 = £95,883.40
interest on loan at ORI = £95,883.40 × 2.25% = £2,157.38
interest paid by employee = £1,366.79
recalculated actual cash equivalent = £2,157.38 – £1,366.79 = £790.59
recalculated cash equivalent (March) = £790.59
number of months already payrolled = 11
total amount already payrolled = (3 x £40.61) + (8 x £64.67) = £639.19
recalculated cash equivalent minus amount already payrolled = £790.59 – £639.19 = £151.40
number of remaining pay periods = 1
new taxable value to payroll in final pay period = £151.40

The employer payrolls £151.40 in the final pay period, following the recalculation.

Original source Annex 2 — payrolling examples for loans and accommodation (non-mandatory benefits)

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