What are Benefits in Kind? A Guide for Business Owners

What is a Benefit in Kind?

A benefit in kind (BIK), are benefits often referred to as 'perks' or 'fringe benefits' and include things like company cars, private medical insurance provided by the company, interest-free loans, and more. It's important to note that most of these benefits are taxable and must be reported to HMRC.

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.

However 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 in retaining existing ones.

Company Benefits: Taxable benefits and Tax-Free Benefits

Company benefits fall under two categories: taxable benefits in kind and tax-free benefits. To ensure you understand the distinction, we’ve listed examples for each type below based on HMRC’s list.

Taxable Benefits (or Benefits in Kind): Examples

• 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 due to its calculation based 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 by 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. It is worth noting that this insurance may increase employer's Class 1A National Insurance contributions.
• Interest-Free 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, 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: Examples

• 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 is 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 and Home Internet: If an employer provides a mobile phone or home internet 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, including directly-contracted childcare or childcare vouchers, can be a significant help for working parents. These benefits can be tax-free up to certain limits, helping to make childcare more affordable. However, it's worth noting that the Childcare Voucher scheme has been closed to new entrants since October 2018, and has been replaced by the Tax-Free Childcare scheme.

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.

💡 You must sign up to payrolled benefits before the beginning of the tax year, which for the 2023/2024 tax year is the 6 April ’23.

As of the 6th April 2023, employers can no longer 'informally payroll benefits', which means payrolling benefits without being formally registered with HMRC (and instead just submitting P11Ds at the end of the tax year) is no longer possible.

Employers now need to be registered with HMRC for payrolled benefits at the beginning of the tax year. See HMRC's update here.

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.

Second, 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 payrolling of benefits is done correctly.

Alternative to payrolled benefits

If you've not registered to payrolled benefits before the beginning of the tax year, you'll need to submit 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. For instance, if an employee has a company car worth £20,000 and they fall into the 20% tax band, they could pay around £800 per year in tax for this benefit. This calculation is necessary to understand the tax due from the employee's side.

From the employer's perspective, Class 1A National Insurance at a rate of 13.8% must be paid on most benefits, such as company cars and health insurance. 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 to payrolled 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, so their value does not need to be reported via a P11D form.

Onfolk does this for you automatically - once you’ve added payrolled benefits for your employees, the platform takes care of reporting it via PAYE for you.

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 must be reported to HMRC using the P11D form. Each employee will be issued with their own P11D form, and you’ll need to report the total Class 1A National Insurance due on all expenses and benefits. Your accountant can help you with this.

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. Onfolk automates this for you.

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 by Bank Giro, BillPay, Direct Debit, Corporate Credit Card, and CHAPS/Bacs. HMRC's website provides specific information on how to make the payment, including bank details and reference numbers.

Onfolk Makes Managing Payroll and HR Simple and Stress-Free

The benefits of combined payroll and HR software is that you save a tonne of time with admin tasks relating to running your business all the while saving money on expensive accountants and HR consultants.

Onfolk is a modern, cloud-based platform built for startup founders and business owners employing a diverse team. Our platform combines a HR software as well as an almost fully automated payroll, so all your employee and pay data is in one place, accesible at all times. Payrolled benefits are fully automated in Onfolk.

As your employee data syncs automatically with your payroll, it takes 3 minutes every month to run. This also means you only need to keep one system updated, and your employee data and payroll are always free of discrepancies.

On top of being simple and fast to use, Onfolk provides you with other tools key to building your team effortlessly: 2-click employee onboarding and offboarding, customisable task lists, integrations with Xero, Quickbooks and your pension provider, fully customisable people metric dashboards and reports, and so much more.

If you use Slack to communicate with your team, Onfolk integrates with Slack too - get reminders for employee birthdays and anniversaries, as well as who is joining soon or on holiday that week.

Running a business comes with so many hats - Onfolk takes care of payroll and people admin for you, so you can focus on growing your team and business instead.

Book a demo today.

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FAQs

What tax do I pay on my company car?

The tax on a company car, also known as Benefit in Kind (BIK), depends on several factors: the car's list price when new, its CO2 emissions, and the type of fuel it uses. The benefit is typically calculated as a percentage of the car’s list price, with the percentage determined by the CO2 emissions. If you also receive free fuel from your employer for personal use, there will be an additional BIK.

What tax do I pay on fuel for my company car?

If your employer pays for fuel for personal journeys, you'll pay tax on this as a separate benefit. The BIK tax on company car fuel is calculated by applying the appropriate BIK rate to a fixed amount, set by HMRC each year. For the tax year 2022/23, this fixed amount is £24,600.

What tax do I pay on a company van?

If you're provided with a company van that you also use for private journeys (other than commuting), a flat rate of £3,500 is used to calculate the BIK. An additional £666 applies if your employer also provides fuel for private journeys. The rates are for the 2022/23 tax year and could change in future years.

Do I have to pay tax on fuel provided by my employer for the company van?

Yes, there is a separate van fuel benefit charge if your employer pays for your private fuel. In the 2022/23 tax year, the flat rate for van fuel benefit is £666. If you pay your employer for all your private fuel or if there's no private use of the van, there's no fuel benefit charge.

What tax do I pay on living accommodation?

The BIK on living accommodation provided by your employer is based on the property's 'annual value'. The annual value is usually the gross rateable value which existed on 31 March 1991. If there's no rateable value, it's what the rent would be for an unfurnished property in the open market. Certain exemptions exist for job-related accommodation.

What tax do I pay on vouchers?

Taxable vouchers are those that can be converted into cash, goods, or services. You pay tax on the face value of these vouchers, which your employer will report on your P11D form. However, vouchers exclusively used for work purposes are not taxable.

Do I pay tax if I use my employer’s credit card?

Yes, if you use your employer's credit card for personal expenditure, this is considered a taxable benefit. The benefit is the amount of personal expense paid by the employer.

What tax do I pay on private medical insurance?

You pay tax on the cost of the insurance premium if your employer covers the cost of private medical insurance. The benefit is reported on your P11D form and is subject to tax at your highest rate.

What tax do I pay on loans provided by my employer?

Loans over £10,000 provided by your employer are considered a benefit and are subject to tax. The taxable amount is the difference between the interest paid (if any) and the official rate of interest set by HMRC.

What tax do I pay if my employer provides me with a mobile phone and/or home internet access?

Provided the contract is between your employer and the provider, one mobile phone and home internet access are considered tax-free benefits. This assumes that these benefits are provided primarily for business use. Any significant personal use could result in a taxable benefit.

What tax do I pay on other assets my employer lets me use?

If your employer lets you use assets like machinery or equipment, you pay tax on the 'annual value' of the benefit to you, less any amount you pay towards the cost. The annual value is usually 20% of the asset's market value when first used.

What tax implications are there if my employer helps towards childcare costs?

Employer contributions towards childcare, such as directly-contracted childcare or childcare vouchers, can be tax-free up to certain limits. For directly-contracted childcare, the tax-free limit is £10,000 per year per child, while for childcare vouchers, the limit depends on when you joined the scheme and your tax rate.

This article is for general informational purposes only and is not intended to provide specific commercial, financial, or legal advice. The content is made available on an "as is" basis, with no guarantee of completeness, accuracy, timeliness or the results obtained from the use of this information. Always consult a professional in the field for your particular needs and circumstances prior to making any professional, legal, or financial decisions.

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