Benefits in kind are what employees or directors receive that are not included in their regular salary or wages, sometimes called "fringe benefits". These perks may or may not be taxable benefits. Benefit-in-kind perks can impact an employee's personal income tax and the employer's national insurance contributions payable.
Knowing what the tax implications are can be complicated, but we've compiled a short article to help you determine which employee benefits count as benefits in kind and how they should be reported to HMRC.
What is Benefit in Kind?
Benefits in kind are assets or services paid for by a company but applied for personal use by the employee. They can be described as any non-cash benefit of monetary value provided to an employee and are sometimes called notional pay, perks or fringe benefits.
When an employee receives a perk from the company that benefits them personally and isn't exclusively necessary for the purposes of the business, it's very likely a benefit in kind. This may include childcare vouchers, private medical insurance, fuel, company cars and other perks.
Benefit in kind tax is charged in order to prevent employees from replacing their salary with benefits. A benefit in kind should be treated like a cash equivalent that contributes to the employee's salary and should be reported.
Why Pay Benefits in Kind?
Benefits in kind have benefits for employers as well as employees. Offering benefits such as education and tuition reimbursements can improve employee skills and boost engagement and job satisfaction.
Many employees prefer perks and benefits over pay raises, which can become a powerful recruitment tool for employers that want to draw the right talent to their business. Benefits can also boost loyalty and employee retention, especially bonuses, pensions, healthcare and stock options.
Examples of a benefit in kind?
Not all benefits in kind incur tax. The most common examples of a taxable benefit in kind (BIK) include the following:
- The use of a company car
- Private health insurance
- Home or mobile phones
- Self-assessment fees
- Non-business travel expenses or entertainment expenses
- Lump sum and redundancy payments
- Non-cash personal gifts
- Car loans
- Accommodation provisions
- Bicycle and safety equipment
In general, the taxable benefit is the extra cost of providing the employee with the benefit. For example, if an employee works for a footwear manufacturer and receives a free pair of shoes, the benefit is the cost of the materials and manufacturing. If an employee works for a train company and receives free travel on their trains, it would be considered a tax-free benefit as the train would need to run anyway, regardless of whether or not the employee used it.
Non-taxable benefits in kind may include meals supplied to employees in a staff canteen, certain costs of travel, certain business expenses paid for on a company credit card in accordance with specific tax rules, work and safety clothes (e.g. safety shoes, overalls), mobile phone contracts between the company and the service provider, and work-related training.
Benefits in Kind in Practice
Understanding which benefits incur tax can be complex, and it's best to speak to a tax expert to understand which perks are considered taxable benefits in kind.
Let's take the example of using a company car or van:
There is no tax to pay on a company van if the employee uses it exclusively to take trips related to their job, e.g. travelling between clients or between home and work. The onus is on the employer to demonstrate that no tax is payable; employers may require employees to keep records of the mileage, date and purpose of their journeys. There is no tax to pay on electric vans and cars.
Tax isn't paid if there is minor private use, e.g. using the company van to move house as a once-off event. This type of use is considered insignificant and doesn't require the employee to pay tax. Tax is not paid on pool cars, e.g. a shared vehicle used by employees that are not taken home by an employee at the end of the day.
Company cars are usually taxable. If the company car is used for private use as well as business use, the employee should pay tax on the value of the car based on the list price and accessories, the vehicle's carbon dioxide emissions, the fuel type and the date of registration. Even so, there are additional exemptions to consider, e.g. if the employee is disabled.
The BIK cost for a car is calculated by multiplying the car’s “P11D” value by the BIK rate and then by the income tax bracket of the individual. These rates are set by the UK government and dependent on the CO2 emitted by the car. Rates can range from 0% to 37%. So, if a car has a P11D value of £10,000 with a BIK rate of 10% and the employee driving it falls in the 20% income bracket, the tax bill will be around £200.
If an employee is provided with free fuel on a car used privately, they need to pay tax on the fuel as well as the company car. Electricity is not treated as fuel for benefit purposes, but there are other rules that apply.
See how complex it can get?
Reporting Benefits in Kind
Benefits in kind should be reported on a P11D form. The benefit effectively increases your salary, and National insurance contributions may be paid on them. These contributions are paid by the company and not the individual.
P11D filings aren't dependent on the company's financial year but must be submitted by the 6th of July following the end of the relevant tax year.
Employers must file a P11D (b) form, which summarises the individual P11D forms completed for the employees and the National Insurance owed on the expenses and benefits provided. The company needs to pay National Insurance Contributions at a rate of 13.8% of the determined value of the benefit in kind.
Companies are also required to operate a system for validating employee expense claims; all receipts and completed expense forms must be collected and stored carefully.
Conditions and exemptions for taxing BIK
Benefits given to an employee's spouse, partner, family members, dependents or guests are taxable. All company directors must pay tax on benefits in kind, regardless of their income.
However, there are a few exemptions. Small gifts, which consist of goods or a voucher that can only be used to obtain goods, made by the business that is not in recognition of job performance and costing less than £250 is exempted, as an example. Trivial benefits, like tea and coffee or small token gifts at Christmas, are also exempt.
If certain conditions are satisfied, the government allows companies to pay up to £500 for private medical treatment without that being a taxable benefit.
Benefits have become extremely commonplace as employers scramble to find creative ways to inspire, attract and retain staff. However, it's important to know how much tax is payable on the benefits provided and when.
Speak to your accountant or tax consultant to find out exactly how much tax should be paid on benefits, which benefits are taxed or tax exempt, and how benefits should be treated within the organisation.