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Salary Sacrifice Arrangements for Employers Explained

We’re diving deep into the world of salary sacrifice arrangements. If you’ve ever wondered what they are, how they work, and what benefits they can bring to your business, you’ve come to the right place. Salary sacrifice arrangements can be a great tool to attract and retain talent, all while saving you and your employees some money. 

What is a Salary Sacrifice Arrangement?

In simple terms, it’s an agreement between you as an employer and your employees to exchange part of their cash pay for non-cash benefits. These non-cash benefits include things like childcare vouchers, pensions, or even cycle-to-work schemes. The key here is that employees willingly agree to this arrangement.

How to Set Up a Salary Sacrifice Arrangement

To set up a salary sacrifice arrangement, you’ll need to change the terms of your employee’s employment contract. This change should be made clearly, and your employee must consent to it. It’s important to note that a salary sacrifice arrangement should never drop an employee’s cash earnings below the National Minimum Wage (NMW) rate. As an employer, it’s your responsibility to ensure this doesn’t happen and to cap salary sacrifice deductions if needed.

When to Alter a Salary Sacrifice Arrangement

Life happens, and circumstances change. Sometimes, you might need to adjust a salary sacrifice arrangement due to life events like marriage, divorce, or changes brought about by unforeseen events like the COVID-19 pandemic. These changes can affect an employee’s financial situation, and salary sacrifice arrangements can be flexible enough to adapt to these circumstances. Always remember to update the employment contract when changes happen.

Exceptions and Considerations

While flexibility is great, there are some rules to follow. If employees constantly switch between cash earnings and non-cash benefits, the expected tax and National Insurance contribution advantages may not apply. But, there are exceptions to this, detailed in the Employment Income Manual 42755.

Calculating the Impact on Tax and National Insurance Contributions

One of the key aspects of salary sacrifice arrangements is understanding their impact on taxes and National Insurance contributions. This depends on the mix of cash and non-cash benefits within the arrangement. For the cash part, make sure you’re correctly operating the PAYE system through your payroll.

For non-cash benefits, you’ll need to calculate their value. If it’s a new salary sacrifice arrangement, calculate the value by using the higher amount of salary given up or the earnings charge under the usual benefit-in-kind rules. It’s worth noting that some non-cash benefits, like pension scheme contributions and workplace nurseries, are exempt from valuation and reporting.

Reporting Requirements

Reporting non-cash benefits differs from cash earnings. Generally, you’ll need to report benefits to HMRC at the end of the tax year using the end-of-year expenses and benefits online form. Plus, you can use the payrolling benefits and expenses online service to show that you’re collecting taxes and benefits through your payroll.

Consulting with HMRC

If there’s any legal uncertainty or you’re unsure about a particular salary sacrifice arrangement, you can contact HMRC’s clearance team.  Bear in mind that HMRC won’t comment on a proposed arrangement before it’s implemented. To keep HMRC happy, be prepared with evidence of the variation of terms and conditions, payslips before and after the variation (if there’s a written contract), and any other relevant documentation.

Examples of Salary Sacrifice

To make things more tangible, let’s look at a few examples. 

  • Employee A sacrifices £50 of their £350 weekly salary for childcare vouchers of the same value. In this case, only £300 is subject to tax and National Insurance contributions, as childcare vouchers are exempt up to a limit of £55 per week.
  • Employee B sacrifices £100 of their £350 weekly salary for childcare vouchers. Here, £295 is subject to tax and National Insurance contributions, and £45 is reported as a non-cash benefit at the end of the tax year.
  • Employee C receives a £5,000 bonus and decides to sacrifice the full amount for an employer contribution to a registered pension scheme. In this case, no employment income tax or National Insurance contributions are charged to the employee, and the total amount goes into the pension fund.

Other Considerations

Remember, salary sacrifice can affect various aspects of your employees’ financial lives. This includes earnings-related payments, benefits, contribution-based benefits, statutory payments, and workplace pension schemes. Always communicate any changes clearly to your employees so they understand the impact on their finances.

Unlocking mutual benefits

Salary sacrifice arrangements can be a win-win for both employers and employees. They offer flexibility, potential tax benefits, and the chance to provide valuable non-cash benefits to your team. It’s important to navigate these arrangements carefully, following legal guidelines and ensuring employees’ cash earnings stay above the National Minimum Wage. With the right approach and communication, salary sacrifice arrangements can be a valuable tool in your organisation’s toolkit. 

Get expert guidance 

If you want to explore the benefits of salary sacrifice arrangements for your business and discuss your options, get in touch today by calling us on 01603 630882. You can also fill out our online form to get started. Let’s improve your employee benefits and financial flexibility together.

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Navigating HMRC’s Latest Off-Payroll (IR35) Compliance Guidelines

If you find dealing with tax laws overwhelming, especially with all the changes happening, you’re not alone. Therefore, we’re committed to making tax matters more manageable for you. The introduction and reform of the off-payroll working rules, commonly known as IR35, have added a layer of challenges to the mix. Luckily, HMRC’s Guidelines for Compliance (GfC) aim to help you understand and implement these rules. To help you, this blog explores the essentials of these guidelines. We’ll also share some insights to ensure your business remains compliant while keeping things running smoothly.

Understanding the Scope and Purpose of IR35

IR35 can sound like a mouthful, but it’s all about ensuring workers who provide their services through intermediaries like personal service companies or partnerships pay the correct taxes and National Insurance contributions. These rules mainly affect medium and large-sized clients in the private and public sectors.

Who Should Be Concerned?

If you’re a client or employer operating these off-payroll working rules, or you hire workers through personal service companies, limited companies, or partnerships, this concerns you. It’s also relevant for agencies in the supply chain and professional bodies advising clients on these rules.

Why Comply?

Compliance is more than just following the rules. It’s about understanding the legislation to make sure your business stays on the right side of the law and runs efficiently and ethically.

Three Key Components of the Guidelines

  1. Preparing and Making Status Determinations: One of the big things with IR35 is correctly identifying and classifying workers. The guidelines stress the importance of preparing for and making accurate status determinations for off-payroll workers. This means figuring out if a worker should be considered employed or self-employed for tax purposes, based on their situation.
  1. Collaboration in the Supply Chain: Working together is important for compliance. All entities in the supply chain need to share information and understand their responsibilities, especially when it comes to identifying workers covered by the off-payroll working rules.
  1. Systems and Processes for Compliance: The guidelines offer examples of systems and processes that can help you avoid errors when determining a worker’s status. This includes understanding different scenarios and organisational structures that may fall under IR35.

Practical Steps for Compliance

  • Use these guidelines alongside existing off-payroll working guidance to get the full picture.
  • Tailor your approach to your organisation’s unique situation and scale in off-payroll working engagements.
  • By following these guidelines diligently, your organisation can significantly reduce the risk of errors and, consequently, the likelihood of incurring penalties.

Understanding Your Responsibilities

  • For Medium and Large-Sized Clients: If you’re in this category, you’re responsible for determining the employment status for tax purposes of workers who provide services through intermediaries.
  • Issuing Status Determination Statements: When a worker falls under the IR35 rules, you must clearly communicate this decision via a status determination statement, giving clear reasons for your determination.
  • Handling Taxes and Contributions: If a worker is considered employed for tax purposes under IR35, you’ll need to handle the deduction of Income Tax and employee National Insurance contributions. Also, you’ll have to pay employer National Insurance contributions and, if applicable, the Apprenticeship Levy.

New Policy Change: Opportunity to Pause Settlement

There’s some good news, as, from the 6th of April, 2024, HMRC will let organisations with open compliance checks under IR35 offset taxes already paid by workers or intermediaries against what’s owed. This applies to Income Tax and National Insurance contributions assessed since the 6th of April, 2017, for off-payroll working errors.

Implications for Your Organisation

You can consider pausing the settlement of your open compliance check until after the 6th of April, 2024, under specific conditions. This includes acknowledging an error and agreeing on the gross liability. Providing HMRC with the necessary information is important.

Proceeding with Compliance Checks

HMRC will keep doing compliance checks as usual, but you can opt to pause the settlement. However, it’s advisable to make a payment on account to avoid accruing statutory interest.

Achieving Ethical Compliance with HMRC’s Off-Payroll Rules

Navigating HMRC’s off-payroll working rules might seem daunting, but it’s all about understanding the law, having a solid plan, and doing business responsibly. By following these guidelines, your organisation not only complies with the law but also sets an example of ethical business conduct. Remember, compliance isn’t just a legal obligation; it’s a mark of a forward-thinking and responsible business.

Seek Guidance 

If you’re ready to take the first step toward seamless compliance and ethical business practices, embrace HMRC’s off-payroll working rules today. Still have questions? Reach out to us on 01603 630882 for help or advice. 

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How Can Employers Get Tax Relief on Employee Pension Contributions

Employers play an important role in the financial security of their employees for later in life through pension contributions. Not only do these contributions help in building a robust retirement fund for employees, but they also offer employers valuable tax relief opportunities. Let’s look at how, as an employer, you can get tax relief on your employee pension contributions. 

Understanding the Two Main Methods

The UK tax system provides two primary methods for getting tax relief on employee pension contributions:

1. Net Pay Arrangement (NPA): In this approach, employers deduct pension contributions before applying PAYE (Pay As You Earn). This method is straightforward for employees, as they receive tax relief at their marginal rate of income tax without needing to take any extra steps. For employees, this translates into immediate tax relief, effectively lowering their taxable income.

2. Relief at Source (RAS): Differing from NPA, this method involves deducting contributions after PAYE. The pension scheme provider then claims back the basic rate tax relief from HMRC, adding this amount to the individual’s pension pot. However, for higher or additional rate taxpayers a further claim must be made to HMRC to receive the full tax relief due. This can be done through their tax code or a Self-Assessment tax return.

Which Method to Choose?

The choice of tax relief method is determined by the employer, not the individual employee. For all new registered pension schemes set up since April 2006, Relief at Source has been the default method. Employers, however, have the flexibility to choose the Net Pay Arrangement for new pension schemes, provided certain regulatory conditions are met. Once a scheme is registered, its form of tax relief remains fixed​​.

Salary Sacrifice Schemes

Many businesses choose the salary sacrifice arrangement linked to pension contributions. Under this arrangement, the employee agrees to a reduction in their salary in exchange for the employer making a higher pension contribution. This method effectively mirrors the Net Pay Arrangement in terms of tax relief. The good news is It can lead to savings on National Insurance contributions for both the employer and the employee.

However, it does require employers to be diligent in their reporting. If a salary sacrifice contribution is reported incorrectly as an employee contribution, it could lead to the pension scheme provider wrongly claiming tax relief from HMRC. The legal responsibility for any overclaimed relief falls on the pension scheme provider, emphasising accurate and careful reporting by employers​​.

Compliance and Reporting Obligations

To benefit from tax relief, employers must ensure their pension contributions satisfy several conditions. These include being paid within the accounting period and being wholly and exclusively for the business. What’s more, the amount of tax relief on substantial contributions may be distributed over several tax years, depending on the size of the contribution and the employer’s financial situation.

Employers are required to accurately report both their own and their employees’ pension contributions. Incorrect reporting can lead to compliance issues and potential penalties, highlighting how important good record-keeping and reporting practices are.

Maximising Tax Relief Benefits

For employers, understanding and properly managing pension contributions can lead to a sizeable tax relief. This relief can significantly reduce the overall cost of providing a pension scheme. Employers should consider the following strategies:

  • Choosing the Right Pension Scheme: Choose a pension scheme that aligns with your payroll system and is suitable for your employees’ tax situations.
  • Leveraging Salary Sacrifice Arrangements: Use salary sacrifice schemes to maximise tax and National Insurance savings.
  • Staying Informed: Keep up to date with changes in tax legislation and pension regulations to ensure you remain compliant and can make the most of the tax relief opportunities available. 

Final Thoughts

For employers, providing a pension scheme is a big part of employee benefits, offering a way for employees to plan for the future. By understanding the methods of Net Pay Arrangement and Relief at Source and sticking to reporting and compliance requirements, you can leverage tax relief opportunities and make sure you don’t pay more tax than you need to. 

At Norwich Accountancy, we’re here to help SMEs like yours make the most out of pension schemes and tax benefits. Tax rules can be tricky, especially with constant changes, but we’re here to guide you. Need help? We’re all about keeping things simple and helping you get every tax relief benefit you’re entitled to.

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Guidance on Rates and Thresholds for Employers from 2023 to 2024

Understanding tax codes, National Insurance contributions, and statutory payments is a crucial element in your role as an employer. It’s also vital to know the updated thresholds and rates set by HMRC to ensure accurate payroll management and tax compliance. To help, we’ve collated seven of the essential rates and thresholds for the 2023-2024 financial year.

1. Income Tax

The personal allowance, the amount of income you don’t have to pay tax on, remains a key figure.

  • Personal Allowance: £12,570
  • Basic rate (20%): For incomes over the personal allowance up to £37,700
  • Higher rate (40%): For incomes over £37,771 up to £125,140
  • Additional rate (45%): For incomes over £125,140

2. National Insurance Contributions (NICs)

You can only make National Insurance deductions on earnings above the lower earnings limit.

NICs thresholds:

  • Lower Earnings Limit: £123 per week.
  • Primary Threshold: £242 per week.
  • Secondary Threshold (ST): £175 per week.
  • Upper Earnings Limit (UEL): £967 per week.

Find the employee contribution rates here

Employer NIC 

You pay secondary contributions (employer’s National Insurance) to HMRC as part of your PAYE bill. 

  • Class 1: For employees earning above the Secondary Threshold, the rate remains at 13.8%.

3. Statutory Payments

Statutory Sick Pay (SSP):

The same SSP rate applies to all employees. However, the amount you pay depends on the number of ‘qualifying days’ they work each week.  Calculate your employee’s statutory sick pay here.

Statutory Maternity Pay (SMP), Paternity, Adoption, and Shared Parental Pay:

  • First 6 weeks: 90% of the employee’s average weekly earnings.
  • Remaining weeks: £172.48 or 90% of the employee’s average weekly earnings, whichever is lower.

4. Student Loan Deductions

If your employees’ earnings are above the earnings threshold, you must record their student loan and postgraduate loan deductions in your payroll software. It will automatically calculate and deduct repayments from their pay. There are several plans for student loan repayments:

  • Student loan plan threshold 1: £22,015 annually, threshold 2: £27,295 annually or threshold 4: £27,660 annually. Deduction rate: 9% on earnings above the threshold.
  • Postgraduate loan plan threshold: £21,000 annually. Deduction rate: 6% on earnings above the threshold.

5. Pension Contributions

Automatic enrolment obliges employers to enrol all workers into a qualifying workplace pension, provided that they ordinarily work in Great Britain and satisfy the age and earnings criteria.

Auto-enrolment thresholds:

  • Qualifying earnings band:
    • Lower level: £6,240 annually.
    • Upper level: £50,270 annually.

Minimum contribution rates:

  • Total minimum: 8% of qualifying earnings.
    • Employer’s minimum contribution: 3%.
    • Employee’s contribution: 5%.

6. Apprenticeship Levy

Employers with an annual pay bill of over £3 million are liable to pay.

  • Rate: 0.5% of the total pay bill.
  • Allowance: £15,000 annual allowance to offset against the levy payment.

7. Minimum Wage

The National Minimum Wage is the minimum pay per hour almost all workers are entitled to by law. 

From 1 April 2023, the minimum wages are:

  • Aged 23 and above (national living wage rate: £10.42
  • Aged 21 to 22: £10.18
  • Aged 18 to 20: £7.49
  • Aged under 18 (but above compulsory school leaving age) £5.28
  • Apprentices aged 19 and over but in the first year of their apprenticeship: £5.28

How Can I Find Out More?  

The government website should have the most up-to-date rates and thresholds. 

Find out detailed information on all the above and more here.

Understanding the details needn’t be daunting. If you ever feel lost, remember: Your business is our business, and we’re always here to lend a friendly ear and a helping hand. 

*All figures are correct at October 2023 and subject to change

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An Employers Guide to Statutory Maternity Pay

As employers, understanding the complexities of Statutory Maternity Pay (SMP) is crucial not just for compliance, but also for supporting the well-being of your employees. In the UK, maternity rights have long been at the forefront, and the recent introduction of the Protection from Redundancy (Pregnancy and Family Leave) Act 2023 has further highlighted why it’s so important. This guide aims to help you navigate the basics of SMP and provide insight into the new 2023 Act.

What is Statutory Maternity Pay (SMP)?

SMP is a weekly payment that eligible pregnant employees can claim when they take time off to have a baby. It’s a legal requirement for employers to provide this to qualified employees.

SMP is divided into two parts: ordinary maternity leave, followed by additional maternity leave. Each lasts 26 weeks, meaning eligible employees can take up to 52 weeks of maternity leave. By law, employees must take at least two weeks after the birth (or four weeks if they’re a factory worker)

Who’s eligible for SMP?

While all employees with a contract are entitled to Statutory Maternity Leave, to be eligible for SMP, an employee must:

  • be on your payroll in the ‘qualifying week’ – the 15th week before the expected week of childbirth
  • give you the correct notice
  • provide proof they’re pregnant
  • have been continuously employed by you for at least 26 weeks up to any day in the qualifying week
  • earn at least £123 a week (gross) in an 8-week ‘relevant period’

Some employment types,  like agency workers, directors and educational workers, have different rules for entitlement. Find out more here.

How much is SMP?

SMP is paid for up to 39 weeks:

  • For the first six weeks: 90% of the employee’s average weekly earnings (AWE) before tax.
  • For the next 33 weeks: £172.48* or 90% of their AWE (whichever is lower).

How do I calculate SMP?

Calculating SMP can be tricky, especially if the employee’s earnings are not consistent. The key is to calculate the Average Weekly Earnings. This generally involves working out the gross earnings over a specific 8-week period leading up to the 15th week before the baby is due.

If in doubt, use the Gov.UK’s maternity, adoption and paternity calculator for employers. Find the calculator here.

How and when to pay SMP?

SMP should be paid in the same way and at the same time as you would pay salaries, i.e., monthly or weekly. It’s subject to tax and National Insurance in the same way as wages.

Can I reclaim SMP?

Yes, you can usually reclaim 92% of SMP payments. If you qualify for Small Employers’ Relief you can reclaim 103%. Your business qualifies for this relief if the total SMP you paid in the tax year is less than £45,000.

The Protection from Redundancy (Pregnancy and Family Leave) Act 2023

The introduction of the 2023 Act has made waves in the realm of employment rights. Here’s what you need to know:

Purpose of the Act

The Act primarily aims to bolster protections for pregnant employees and those on family-related leave (like maternity or paternity leave) from redundancy. It stems from a recognition that these employees often face vulnerabilities in the workplace and aims to create a safer, more supportive environment.

Key Provisions

Though we’re still waiting for the regulations to bring the full proposals into effect, the Act’s core principle is clear: employers cannot make employees redundant during their pregnancy, maternity leave, or during a six-month protective period after the end of their maternity leave, unless in exceptional circumstances.

Implications for Employers

  1. Review Redundancy Protocols: Ensure your redundancy procedures comply with the new law. Redundancies involving pregnant or new mothers should be treated with extreme caution and sound justification.
  2. Training: Make sure your HR and management teams are fully briefed on the new legislation to prevent inadvertent breaches.
  3. Document Decisions: Always document decision-making processes, especially when it concerns redundancies. In any disputes, having a clear paper trail will be invaluable.
  4. Open Communication: Keep lines of communication open with your employees. Clear understanding and transparency can prevent misunderstandings and foster trust.

Informed and in the know

Navigating the world of Statutory Maternity Pay and the new 2023 Act might seem daunting. But with a clear understanding and proactive approach, it’s entirely manageable. If you’re unsure how the maternity law changes will affect you or your business, or if you’ve any further questions, it’s a good idea to speak to an employment law specialist. As always, promoting a supportive and understanding workplace culture will go a long way in ensuring the well-being of your employees and the smooth operation of your business.

Stay tuned for more updates on the regulations of the 2023 Act, and for any further assistance or accounting needs, don’t hesitate to get in touch.

*figures are subject to annual changes. For current figures, take a look here

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A Guide to the New Employment Laws in 2023

The UK’s employment law landscape is constantly evolving, and 2023 so far has been no exception. New laws and regulations regarding employment aiming to protect workers’ rights, promote diversity and offer better working conditions have been passed with some coming into effect in 2023 and others in 2024. So, what are the main changes, and how could they affect you?

Key changes to UK employment laws

Here are five of the notable changes you should be aware of:

  1. Increased flexibility for employees

The pandemic changed how we work, and the government responded by introducing a framework around remote working and requiring employers to discuss and document remote work policies. 

With effect from 1 April 2023, employees now have the right to request flexible working from day one of employment. This removes the existing 26-week qualifying period. Employers will also be required to respond to a flexible working request within 2 months and consult with employees before rejecting it if that’s the decision.

  1. Enhanced protection for pregnant women and new parents. 

The Protection from Redundancy (Pregnancy and Family Leave) Bill 2023 came into force on 24th July 2023, and the regulations needed to bring the proposals into effect are working their way through Parliament. 

Whilst we don’t know yet when the government will make the changes they’ve talked about, the Act will enhance redundancy protection for pregnant workers and working parents returning to the workplace after family-related leave. The Bill will include the right to be offered a suitable alternative vacancy and to be consulted on any redundancy plans.

  1. New rights for carers. 

The Carers’ Leave Act 2024 was passed on 24th May 2023 and gives employees the right to take unpaid time off work to provide or arrange for the care of a dependant with a long-term care need. The Bill introduces a statutory entitlement of five days of unpaid leave per calendar year which will be available to eligible employees from the first day of their employment. The Act is expected to come into force in 2024 and will be a significant step forward for carers who currently have very few legal rights in the workplace.

  1. Increased pay for statutory leave. 

From 2 April 2023, the statutory rate of pay for maternity, paternity, adoption, shared parental and parental bereavement leave increased from £156.66 to £172.48 per week. This is a welcome increase for employees taking statutory leave and helps to ensure they’re not financially worse off when on leave.

  1. Update of statutory redundancy pay calculations.

New limits on employment statutory redundancy pay came into effect on the 6th of April. The result means that employers that dismiss employees for redundancy must pay those with two years’ service an amount based on the employee’s weekly pay, length of service and age. 

Informed and in the know

Whilst there are other changes to the UK’s employment laws going through Parliament, these five are important ones to be aware of. It’s in your best interest to know what they mean to make sure you know what you’re entitled to as an employee or what you need to comply with as an employer. 

If you’re unsure how the new employment law changes will affect you or your business, or if you’ve any further questions, it’s a good idea to speak to an employment law specialist. And with some of these changes impacting pay and salaries, we can help give you peace of mind when it comes to payroll.

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Understanding the P11D and What to Include to Meet the July Deadline

Tax and filling in forms go hand in hand. If you’re an employer and your employees receive taxable benefits in kind, then you need to know about the P11D as it must be completed by the 6th of July each year.

The important P11D sections to complete

There are different sections in the P11D form to complete in full. The most important sections include:

  • Section 1: employee details. This section includes the employee’s name, address and National Insurance number.
  • Section 2: benefits in kind. This section lists all the benefits the employee has received during the tax year.
  • Section 3: calculation of taxable benefits. This section calculates the amount of tax due on the employee’s benefits.
  • Section 4: employer’s declaration. This section must be signed by the employer to confirm the information on the P11D is correct.

If you’re an employer, you must complete the P11D form correctly and on time. If not, you could be hit with a fine from the HMRC.

Tips for completing the P11D

Here are our top tips for completing the P11D form:

  • Start early. Don’t wait until the last minute to complete the P11D form. Give yourself plenty of time to gather all the information you need.
  • Use the right version. There are different versions of the P11D form depending on the type of business. So, make sure that you use the right version for your business.
  • Check your work. Once you’ve filled in the P11D form, check it then check it again.
  • Submit the form on time. Always submit the P11D form to HMRC by the 6th of July each year to avoid penalties.

P11D extra tips

  • Keep good records. Keep all the information needed to complete the P11D form, such as receipts, invoices and contracts.
  • Use a payroll software program. This helps you calculate the tax due on your employees’ benefits.
  • Get help from a professional. If you’re unsure how to complete the P11D form, always get help from a qualified accountant or tax adviser.
  • We’re here to help make sure you file your P11D right the first time, on time. So before the deadline rolls around again next year, get in touch to find out more.