The use of benefits in kind by employers to compensate or reward employees is a well-established practice in the UK. These benefits very often form part of an overall salary package designed to attract and retain top talent. However, providing employees with non-cash benefits comes with certain statutory responsibilities to HM Revenue and Customs (HMRC).
If you’re an employer and provide benefits in kind to employees, you might need to submit certain information to HMRC and deduct and pay tax and National Insurance on these. Below we look at how the reporting and payment rules apply to taxable benefits, including payrolling and using form P11D.
What are benefits in kind?
Benefits in kind (BIK) are non-cash benefits purchased or provided by an employer to an employee in addition to their salary. For tax purposes, many of these benefits are treated in the same way as earnings, counting towards the individual’s employment income. This is because the benefits have been provided by reason of employment, where their monetary value is regarded by HMRC as part of the overall reward for the job.
The amount of a benefit in kind which is treated as earnings from the employment is typically the cash equivalent value of the benefit to the employee, although there are different rules on valuing the taxable BIK depending on the benefit provided.
Examples of benefits in kind
Common examples of benefits in kind include:
- The private use of a company car and fuel
- The provision of private medical insurance
- The provision of living accommodation
- The provision of interest-free or low interest loans
This list is not exhaustive, where there are various other types of benefits that can be purchased or provided by an employer to an employee in addition to their salary.
The rules on benefits in kind can be complex, including special rules relating to optional remuneration arrangements (also known as salary sacrifice), so you should always seek expert advice from a tax specialist if in doubt.
Benefits in kind tax rules
There are different rules for what you must report and pay to HMRC depending on the type of benefit that you provide to an employee. It’s only in limited cases that the benefit will be tax-free.
Employers will also pay Class 1A National Insurance contributions on most taxable benefits in kind.
Below we set out the basic Income Tax and National Insurance rules relating to some of the most common taxable benefits by way of illustration:
Company car and fuel
If you make a company car available to an employee for private use, tax is usually payable on the value to that individual in using the car for personal journeys. Private use will include employees’ journeys between home and work, unless the employee is travelling to a temporary place of work.
The benefit to the employee of a company car is based on how much it would cost to purchase and the type of fuel it uses. However, this value can be reduced if, for example, the employee pays something towards its cost or the car has low CO2 emissions. If you pay for the fuel that an employee uses for personal journeys, tax will need to be paid on this separately.
Unless the car you provide is exempt, for example, where it’s for business use only, or where the fuel you buy is paid back by the employee in full, you must deduct tax at source or report these benefits to HMRC. As the employer, you must also pay National Insurance contributions on the value of the car and fuel benefit.
Private medical insurance
If you provide medical or dental treatment or private medical insurance to your employees, unless the health benefit is exempt, tax will be payable by the employee and you will be required to pay National Insurance on the value of this benefit. Exempt benefits can include, for example, medical checks or health screenings for one year, or treatment or insurance related to injuries or diseases that result from your employee’s work.
When working out the taxable benefit, the value of the benefit to the employee is based on the cost of providing the treatment or insurance. If you reimburse your employee’s costs, the value of the benefit is the amount you reimburse.
If a house, flat or any property owned or rented by you is made available for an employee’s use, there is a taxable benefit, unless the accommodation is necessary or usually provided for the job, for example, agricultural workers living on farms or a manager living above a pub.
The benefit to the employee of living accommodation is based on the higher of the ‘annual value’ and rent you pay, minus any amount you receive from the employee. The annual value for a property is the rent that might reasonably be obtained. For properties based in England and Wales, the annual value is based on the 1973 gross rating value. There can be additional charges if the cost of the property is more than £75,000. However, the benefit of living accommodation is reduced proportionately where the property is used for only part of the year, or if the property is shared or only partly used for business use.
As well as the costs of the accommodation itself, if you pay any household bills on behalf of the employee, this will give rise to an additional and separate benefit. For both living accommodation and any accommodation-related expenses, there will also be an obligation to pay National Insurance on the value of these benefits.
More detailed information on accommodation expenses and benefits, including how to work out the taxable value, can be found at: www.gov.uk/expenses-and-benefits-accommodation.
Low cost loans
If you provide an employee with an interest-free or low interest loan, there will usually be tax and National insurance to pay on this benefit. This could be, for example, to pay for a season travel ticket for the employee’s commute to work, although the combined outstanding value of any loans must exceed £10,000 for the tax year in question.
The value of a beneficial loan arrangement is calculated on the difference between the interest rate paid by the employee and the official rate of interest set by the Bank of England. If you decide to write the loan off, the taxable benefit will be the amount written off.
How do you declare taxable benefits in kind?
When providing employees with taxable benefits in kind, you can report these benefits to HMRC at the end of the tax year using a P11D form. This summarises the value of any benefit that the employee has been provided with. This information will then be used by HMRC to adjust the employees’ tax code to include the value of the taxable benefits.
You can also manage benefits in kind through your payroll system. When using ‘payrolling’, you must notionally add the cash equivalent of the employee’s benefit to their pay to deduct the correct amount of tax. If you’re registered for payrolling, HMRC will then ensure the value of the benefit is not included in your employees’ tax codes to avoid them being taxed twice.
You may need to use a mixture of both payrolling and P11D methods when reporting taxable benefits in kind. You can payroll most benefits, except employer-provided living accommodation and beneficial loans.
How to use form P11D
Form P11D is the paperwork you will be required to complete and submit to HMRC at the end of the tax year, either online or by post, when reporting any non-payrolled taxable benefits for employees. This means you must submit a P11D form if you’re only paying tax on some and not all an employee’s benefits in kind through your payroll.
If you’ve failed to register with HMRC to use the payrolling benefits and expenses online service prior to the beginning of the tax year (6 April), you may be able to informally payroll if HMRC agrees. However, you will still need to submit a P11D form (marked ‘payrolled’) to stop HMRC collecting tax that has already been directly deducted.
For both payrolled and non-payrolled benefits, you will also need to submit a P11D(b) form so that you can pay any Class 1A National Insurance contributions on the value of the benefits that you’ve provided to an employee.
Once completed, you must give each individual a copy of their P11D information and send the completed forms to HMRC by 6 July following the end of the tax year.
If you do not make your end-of-year returns or submit incorrect returns on forms P11D and P11D(b), you may be liable to financial penalties. You also need to pay any Class 1A National Insurance owed on any benefits in kind by 22 July if the payment is by an approved electronic method, or 19 July if paying by cheque.
What records should be kept on benefits in kind?
You must keep a record of all benefits in kind you provide to your employees. Your records must show that you’ve reported these benefits accurately and any end-of-year forms are correct, including your P11D(b) and the Class 1A National Insurance contributions payment.
HMRC may ask to see proof of how you’ve accounted for each benefit at the end of the tax year. Your records should include the date and details of every benefit you provide, any information used to work out the amounts you disclose, and any contributions made by the employee. These records must be kept for a period of 3 years from the end of the tax year they relate to.
Benefits in kind FAQs
How much tax do you pay on benefits in kind?
With many benefits in kind (BIK), the employee has to pay Income Tax at the applicable rates based on their overall salary, including a notional cash equivalent for the BIK. Class 1A National Insurance is also payable by the employer.
What is a P11D benefit in kind?
A P11D benefit in kind is a benefit provided by an employer to an employee or director, where the value of that benefit is declared in an end-of-year report to HMRC using form P11D.
How do you calculate benefit in kind?
A benefit in kind is typically calculated using the cash equivalent value of the benefit to the employee, although there are different rules on valuing different taxable benefits, such as for company cars and fuel for private use.