What is a benefit in kind?
Benefits in kind (BIK) are benefits provided to employees, such as company cars, private medical insurance, interest-free loans, and more. These benefits are often taxable and must be reported to HMRC.
Offering benefits in kind can be an important part of your company’s remuneration strategy, as it can make the employment package more attractive to prospective employees and help retain existing workers.
For an employer in the UK, providing benefits in kind means that they have additional responsibilities to HMRC. These include reporting the benefits via PAYE or on a P11D form, paying any Class 1A National Insurance due on them, and potentially adjusting employees' PAYE (Pay As You Earn) tax codes.
What are the different types of company benefits?
Company benefits fall under two categories: taxable benefits in kind and tax-free benefits. To make sure you understand the difference, we’ve listed examples for each type below based on HMRC’s list.
Taxable benefits (or benefits in kind)
Company cars: A company car is a vehicle provided by the employer that the employee can use for both work and private purposes. This benefit is quite popular due to the convenience and potential cost savings for the employee. However, it's important to note that the tax on company cars can be quite high depending on the vehicle's list price and CO2 emissions. Employers must report this benefit to HMRC and pay Class 1A National Insurance on the value of the benefit
Private medical insurance: Private medical insurance covers the cost of private healthcare and is a sought-after benefit for many employees. Premiums paid by the employer are usually considered a taxable benefit and need to be reported to HMRC, via payrolling benefits or a P11D form
Loans: Offering employees interest-free or low-interest loans can be a valuable perk, especially for major purchases like a home or car. However, any such loans over £10,000 attract tax, which is calculated on the difference between the interest paid and the official rate of interest
Living accommodation: Living accommodation provided to employees is considered a taxable benefit, typically valued at the rental value of the property. Employers must take care to assess this accurately and to report it correctly to HMRC. This benefit is particularly common in certain sectors, such as hospitality
Assets lent to an employee: Assets loaned for personal use can include a range of items, such as company laptops or equipment used outside the workplace. This can be a taxable benefit, usually based on the annual value of the benefit's use, less any contributions made by the employee. It's crucial for employers to keep accurate records of these assets and their usage
Tax-free benefits
Workplace nurseries: Providing a workplace nursery is a significant perk for working parents, as it can offer substantial savings and convenience. If an employer provides a nursery that's available for all staff members' use, it's generally tax-free
On-site sports facilities: On-site sports facilities can be a great way to promote health and wellness among employees. As long as these facilities are on the employer's premises and available for all staff members, they're typically tax-free
Trivial benefits: Trivial benefits are small, non-cash perks that cost the employer £50 or less. These can include gifts, staff parties, or meals, and they're generally tax-free, provided they meet certain conditions
Mobile phones: If an employer provides a mobile phone for business use, this is usually a tax-free benefit. The key is that the contract must be between the employer and the provider, not the employee
Childcare support: Childcare support can be a significant help for working parents. These benefits can be tax-free up to certain limits, helping to make childcare more affordable
How do you report a benefit in kind?
Step 1: Registering for payrolling benefits
To handle the tax on benefits through regular payroll, also known as 'payrolling benefits in kind', you need to register with HMRC. You can do this online via the PAYE for employers service. Registration should be done before the start of the tax year (6th April) in which you plan to start payrolling. Payrolling benefits can reduce paperwork and provide clarity to employees about their tax deductions.
Why sign up to payrolled benefits?
The main advantage of signing up to payrolled benefits is that it'll reduce your administrative load of having to issue electronic P11Ds to every employee at the end of the tax year. You'll save time and remove the risk of potential manual errors in issuing manual P11Ds.
Secondly, employees will pay tax on the company benefits they're signed up with during the tax year they receive it. The cash value of the benefit they receive is also visible in the employees' taxable gross figure in their payslip, which makes it more tangible.
The final perk to payrolled benefits is for employees, who will pay the right amount of tax on their benefits from the start. PAYE tax code errors and underpaid tax liabilities associated with benefits are less likely to occur if the payrolling of benefits is done correctly.
Alternative to payrolled benefits
If you've not registered for payroll benefits before the beginning of the tax year, you'll need to submit electronic P11Ds for every employee benefitting from them at the end of the tax year. Your accountant should be able to help with that.
Step 2: Calculate the tax liability on benefits in kind
The tax due on benefits in kind depends on the value of the benefits and the employee's income tax band. Different types of benefits are taxed slightly differently, so the value of each benefit must be worked out according to HMRC’s guidance.
Employers must pay Class 1A National Insurance at a rate of 15% on taxable benefits, so it's vital to account for this when budgeting for benefits.
Step 3: Report benefits in kind to HMRC
If you’ve registered with HMRC for payroll benefits for all of your company’s benefits in kind, you shouldn’t need to submit a P11D form for the employees whose benefits have been payrolled. The benefits that have been processed through payroll will be taxed in real-time through PAYE.
Regardless of whether you've payrolled all of your benefits or not, you still need to submit a P11D(b) form to report the total Class 1A National Insurance due on all expenses and benefits.
If you’ve not registered to payrolled benefits on time, you’ll need to report all benefits in kind using a P11D form for each employee receiving benefits.
It's crucial you submit this form by 6th July following the end of the tax year.
Step 4: Pay the tax due on benefits in kind
Once the benefits have been reported, the tax is typically collected by adjusting the employee's tax code for the employees’ liability, which reduces their personal allowance and increases the amount of tax paid through PAYE. If you've registered for payrolling benefits, the tax on benefits is handled through your regular payroll system.
As for Class 1A National Insurance contributions due, those need to be paid by the 22nd July (or 19th July if you're paying by cheque). The payment can be made in a variety of ways, including Direct Debit, CHAPS/Bacs, corporate credit card and cheque. HMRC's website provides specific information on how to make the payment.
Image from Unsplash, published by seogalaxy
