What are benefits in kind?

Jordan Macey

May 11, 2021

benefits in kind guide

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Introduction

For self-employed persons or employers, it can be challenging trying to understand the rules surrounding benefits in kind.

These can be complicated; some benefits are taxable while others aren't, and it gets tricky figuring out which rules apply to your situation. 

To make things a little easier to understand, we've written up a quick guide below.

After reading our guide, you'll understand what benefits in kind are, have a clearer idea of which ones are taxable (and which ones aren't), and get an overview of what you need to do when it comes to reporting and paying taxes on benefits in kind. 

Do keep in mind that this isn't a definitive guide, as HMRC's decision to impose a tax varies by situation. If you need specific advice, do consult our specialist accountants at Forma.

What is a benefit in kind?

Benefits in kind—also commonly referred to as fringe benefits or perks—are benefits provided to a director or employee that aren't included in their salary or wages

These can be assets or services, such as company cars, private health insurance or non-business travel and entertainment expenses. Benefits that have a monetary value will need to be reported to HMRC, as these might be subject to taxes. 

Examples of benefits in kind

Here are some examples of taxable benefits in kind:

  • Company vehicles
  • Private health insurance
  • Non-business travel expenses
  • Non-business entertainment expenses
  • Loans

Other types of benefits in kind aren't taxable. These include: 

  • Staff meals provided at a canteen
  • Certain types of childcare arrangements
  • Payments to a pension
  • Workplace sports facilities
  • Workplace safety equipment
  • Certain types of transportation expenses, such as subsidies for public bus services

You can check out HMRC's resource for further information on the different types of expenses and benefits, plus the associated tax treatment.   

The rules surrounding each type of benefit can be complicated.

Depending on the context, HMRC may decide to impose a tax charge. As such, we recommend speaking to an accountant about your situation if you need personalised advice.

Computer mouse on sheets calculating benefits in kind

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Reporting and paying tax on benefits

Employers are required to report all benefits in kind at the end of the tax year.

As benefits contribute to an employee's income, there may be National Insurance contributions to be paid on them. These contributions are paid for by the employer at a rate of 13.8% of the determined value of the benefits in kind.  

Benefits in kind can be reported and taxed in two ways: 

1. Submission of the P11D form 

A P11D is a tax form that records the employment benefits that employees and directors of a company have received across the year.

As an employer, you'll need to submit a form for each employee that you've provided benefits or expenses for.

If you're self-employed, you're considered both the employer and employee. As such, you're responsible for filing the P11D.

You're also required to submit a P11D(b) if the conditions below apply.

The conditions for submitting a P11D(b) are:

  • You've submitted any P11D forms
  • You've paid your employees' expenses or benefits through your payroll
  • You've received a reminder from HMRC

If you're not familiar with the P11D(b), it's a form that sums up the total amount of taxable benefits that an employer has provided for its employees, and indicates the amount of Class 1A National Insurance due on the expenses and benefits provided. 

2. Paying tax on benefits through your payroll

The second option is to deduct and pay tax on employee benefits through your payroll.

To do so, you'll need to register with HMRC before the start of the tax year (6th April). Do note while the P11D form isn't required if you're payrolling benefits, you'll still need to submit the P11D(b). 

How to report benefits in kind

You can report benefits in kind through the following: 

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What's Inside:

  • Allowable business expenses
  • Employee expenses
  • Travel expenses
  • Office & equipment expenses
  • Professional services expenses
  • General expenses
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Limited Company Expenses Guide

What's Inside:

  • Allowable business expenses
  • Employee expenses
  • Travel expenses
  • Office & equipment expenses
  • Professional services expenses
  • General expenses

What are the important deadlines I need to know?

Important P11D PAYE Dates

Maintaining proper records

In maintaining proper records, you'll be able to show that you've reported accurately, and that all the information in your end-of-year forms are correct should HMRC seek to review your records.

You'll need to keep a record of the following:

  • The date and details of every benefit you've provided
  • Payment that your employee has contributed to a benefit
  • Information required to calculate the amounts indicated in your end-of-year forms
  • Any communication you have with HMRC

All payroll records should be kept for three years from the end of the tax year they relate to. In many instances, employers retain these records for six years, as certain payroll records are also considered accounting records. The latter should be kept for six years following the end of a company’s accounting period.

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How do I pay an employee?

If you're paying an employee for the first time, you'll need to set up payroll. You need to take the following steps:

  1. Register as an employer with HM Revenue and Customs (HMRC) and get a login for PAYE Online.
  2. Choose payroll software to record employee's details, calculate pay and deductions, and report to HMRC.
  3. Collect and keep records.
  4. Tell HMRC about your employees.
  5. Record pay, make deductions and report to HMRC on or before the first payday.
  6. Pay HMRC the tax and National Insurance you owe.
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10 new business obligations when hiring your first employee

Being a solo entrepreneur is an exhilarating experience, but eventually, a successful business will create enough work for more than two or three people to handle.

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You may be used to taking care of your own income, taxes, and workplace concerns but as an employer, you are suddenly responsible for the livelihood of one or more other people. People to whom you will be their boss with all the nitty-gritty details packaged with it.

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What is a directors loan account?

As a limited company director, you can access the money in your company bank account through a facility known as a director's loan.

This can come in handy in instances when your personal finances are in need of a boost, yet taking out a director's loan is a decision that requires careful consideration. That's because there are tax and accounting implications, and it's best to speak to an accountant so that you fully understand the consequences.

But before you dive into the details, you'll need to have an understanding of the basics-such as what a director's loan account is, what the loan can be used for, tax rules you need to be aware of and more.

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How do I pay a Supplier?

There are various ways to pay your suppliers. Common payment methods include bank transfers, credit card payments and Letters of Credit.

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What is a Limited Company?

Limited companies provide numerous benefits, from tax savings to limiting your liability.

But the first step is to understand what a limited company is exactly, and whether setting up such a company can help you achieve your goals. This article will clearly explain the pro's and con's so you can make an educated decision.

In a nutshell, a limited company is a private company that's a separate legal entity from its owner(s). For freelancers and contractors, a limited company is one of the three main business structures that you may use to run your business (the others being sole trader and umbrella companies).

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Deciding between Sole Trader vs Limited Company vs Umbrella

If you're planning to start out on your own, one of the most important decisions you'll need to make is figuring out how you should structure your business.

As a freelancer, contractor or small business owner, there are three main types of legal structures you should consider:

  • Sole proprietorship
  • Limited company
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It's a decision that requires careful consideration, and it's important that you seek advice from qualified professionals when you weigh out the pros and cons of each business structure. To begin with, you need to have a good grasp of the basics - and here's where our guide comes into the picture.

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What is a Limited Company?

A limited company is a type of business structure where the company has its own legal identity. The assets and liabilities of the company are separate from the personal finances of its owner.

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How/ when do I pay myself Dividends?

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How do I hire a new employee?

To hire a new employee, you need to:

If you're hiring staff for the first time, refer to HMRC's guide on the steps you need to take.

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How do I pay my student loan?

If you're self-employed, HMRC will work out your loan repayment amount from your tax return. You make your repayment the same time you pay your tax.

If you're an employee and your salary is above the minimum amount, your loan repayments will be deducted from your salary by your employer.

Additional repayments can be made through your online repayment account and by card, bank transfer or cheque.

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How do I pay myself dividends?

To pay a dividend, you need to:

  • Hold a directors' meeting to ‚Äòdeclare' the dividend.
  • Keep minutes of the meeting, even if you're the only director. For smaller companies, this may often be just a case of getting the paperwork completed.
  • Issue dividend vouchers.
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What is a Director's Salary?

As a limited company director, you pay yourself through drawing a salary and receiving dividends from your company.

Drawing a salary from your company is fairly similar to how you'll be paid if you were employed elsewhere-you'll run payroll, submit the required information to HMRC each month and receive your salary (after income tax and NIC have been accounted for).

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What do I need to do as a Company Director?

Your responsibilities as a limited company director include:

  • Your company must be registered at Companies House
  • Your company's annual accounts must be filed at Companies House
  • A Confirmation Statement must be submitted annually. This can be done online or via post. This is a filing requirement introduced in 2016 to replace the Annual Return (Form AR01).
  • Submit an annual Corporation Tax to HMRC. Any outstanding tax must be paid within nine months and one day of your company's year-end accounting.
  • Register for Self Assessment with HMRC, and submit your personal tax return each year.
  • If you have employees and are running the company payroll, you need to report your employees' payments and deductions to HMRC on or before your employees' payday. You need to pay what you owe to HMRC each month.
  • If your VAT taxable turnover exceeds the VAT threshold, you'll need to register for VAT and complete your VAT returns online at the end of every financial quarter.
  • Maintain proper company records
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When do I make PAYE payments to HMRC?

If you're paying salaries to employees or directors, you need to register for PAYE and pay your PAYE bill to HMRC.

  • Monthly payments: Your PAYE bill is due on the 22nd of the next tax month.
  • Quarterly payments: Your PAYE bill is due on the 22nd after the end of the quarter.

There are various ways to make your payment.

  • Same or next day payments: online or telephone banking, CHAPS
  • Payments processed in 3 working days: debit or corporate credit card payments (online), Bacs, cash or cheque payments at your bank or building society, Direct Debit, by cheque through the post
  • Payments processed in 5 working days: Direct Debit (if it's the first time you're setting up a Direct Debit payment)

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What are Director's withdrawals?

As a limited company director, there are three ways in which you can withdraw money from your company:

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How do I pay a Limited Company Pension?

If you're operating as a sole trader, you can contribute to a personal pension scheme.

If you're a limited company director, you can make pension contributions as an individual (as an employee), as well as through your company (as an employer). For the latter option, your pension contributions are paid directly from your business bank account.

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What are my Limited Company Directors Responsibilities?

As the director of a limited company, your responsibilities include:

  • Your company must be registered at Companies House
  • Your company's annual accounts must be filed at Companies House
  • A Confirmation Statement must be submitted annually. This can be done online or via post. This is a filing requirement introduced in 2016 to replace the Annual Return (Form AR01).
  • Submit an annual Corporation Tax to HMRC. Any outstanding tax must be paid within nine months and one day of your company's year-end accounting.
  • Register for Self Assessment with HMRC, and submit your personal tax return each year.
  • If you have employees and are running the company payroll, you need to report your employees' payments and deductions to HMRC on or before your employees' payday. You need to pay what you owe to HMRC each month.
  • If your VAT taxable turnover exceeds the VAT threshold, you'll need to register for VAT and complete your VAT returns online at the end of every financial quarter.
  • Maintain proper company records.
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PAYE, P60's and Paying Yourself Guide

  • What is PAYE
  • PAYE when self employed
  • When to register for PAYE
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  • Sole trader income tax calculations
  • Limited company dividends & salary
  • Dividend tax rates
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What are Unallocated Payments?

Unallocated payments are where the client has given you more money than they owe.

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How do I pay myself when Self Employed?

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Table showing expense payment and benefit in kind (BIK) calculations for P11D form
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