Tax on Benefits-In-Kind
If you receive any other benefits as part of your employment in addition to your salary, it may be the case that you are receiving a benefit-in-kind (BIK). You might see it as a workplace perk, or sometimes they’re referred to as ‘fringe benefits’, but what you need to be aware of, is that although they can seem like a nice added bonus, they may not necessarily come for free.
What is a benefit-in-kind?
Common examples of BIKs can include access to a company car which you’re also allowed for personal use – such as driving your kids to school and going shopping, private medical insurance or even free canteen meals. In essence, anything that has been provided to you which is not “wholly, exclusively, and necessary” for you to perform your employment duties is considered a BIK. However, BIKs can be split into two groups – those which attract tax and those which are tax-free. We explain these below.
What are tax-free benefits-in-kind?
Tax-free BIKs are possibly the most common benefits you’re likely to encounter, for the very reason that they are tax-free. Neither the employee nor the employer is required to pay additional tax as a result of these benefits. The below is not an exhaustive list but just some of the most popular that you’re likely to come across:
- Employer contributions to an approved workplace or personal pension scheme
- Subsidised canteen meals so long as this is offered to all employees
- In-house leisure facilities such as gym, pool table or other entertainment
- Other in-house facilities such as childcare services at your place of work
- Staff parties so long as every employee is invited and cost per person is not over £150 per year
- Bicycles and cycling equipment as part of the Cycle to Work scheme
- Gifts for reasons that are unconnected to the performance of your job such as birthday, wedding or retirement (but the value of these gifts should not exceed £250 in a single year)
- Trivial benefits which are less than £50 in value and are not cash or cash voucher such as free coffee and tea in the office
- Office or workplace car park
- Uniform or safety equipment provided which is necessary for you to complete your job
A comprehensive list of tax-free employment benefits can be found here.
What are taxable benefits-in-kind?
Other benefits which do not make up part of your taxable earnings may still however be of generous value. Therefore, in order to prevent employers from reducing employees’ salaries and topping it up with free benefits, the government impose employer’s national insurance (NI) and employee’s income tax to be paid on some BIKs. Again, the below is not a complete list but some of the most common BIKs and an explanation of when they will attract tax:
- Company car where you are allowed to use it for personal use. The total value of this benefit will take into consideration the list price of the car, the vehicle’s carbon dioxide emissions, the type of fuel the car uses (with the exception of pure electric vehicles) and the date of registration of the car.
- Fuel for the company car where it is provided by your employer and you are free to use it for your personal use.
- Accommodation which has been provided rent-free or below market rent AND where you are not required to live there in order to perform your job role.
- Non-specific regular clothing or clothing allowance which means clothing that is not specifically required in order for you to carry out your job such as protective goggles. Often this can also be determined as clothing that you would also wear outside of work.
- Private medical insurance
- School fees for employees’ children
- Interest-free or cheap loans provided to you as an employee from the company or business where the amount is over £10,000
- Holidays or holiday vouchers
How do I calculate what tax I need to pay on a benefit-in-kind?
There are different and complex rules on what kind of tax needs to be paid, and by who, depending on what benefit is being offered/received and how it has been administered. In general, BIKs can attract income tax, employer’s NI and employee’s NI.
As an employee who receives a BIK, you will be charged income tax. To calculate how much, you need to apply your personal income tax rate band (20% for basic rate, 40% for higher rate or 45% for additional rate) to the taxable value of the benefit, which HMRC defines as the cash equivalent. This means that, if it costs your employer £600 per year to provide you with gym membership and you are a basic rate taxpayer, you will need to pay 20% of £600 as income tax on this benefit.
Employers who provide BIKs to their employees will also need to pay tax in the form of employer’s NI at a rate of 13.8%. Again, this is applied to the taxable value of the benefit. However, the cost to provide BIKs is an allowable tax-deductible expense which means it can be taken off profits for corporation tax purposes. Employers may choose to offer BIKs as a more affordable way to reward staff than through their salary.
In most instances, although an employee may have to pay income tax on the BIK, they will not have to pay NI on it which is one tax saving they make. To ensure BIKs do not attract employee’s NI, it is important to administer the benefit in a way where the employee is not receiving cash or equivalent such as vouchers – as this will be treated as earnings and be liable to both income tax and employee NI.
A full list of employment benefits and how they will be taxed depending on how they have been offered can be found here.
How do I report and pay for tax on a benefit-in-kind?
The responsibility to declare the BIKs that have been received by employees is on the employer. To do this they must complete and submit the P11D form to HMRC by 6 July following the tax year in which the benefits were received. For example, if an employee was in receipt of BIKs between 6 April 2019 to 5 April 2020, the P11D form deadline would be 6 July 2020. The form provides a list of all possible benefits which the employer simply selects the relevant ones and states the value of the benefit that was provided to the employee. A copy of this form should also be provided to the employee.
Employers will also need to complete the P11D(b) form which can be accessed through the HMRC Government Gateway. The P11D(b) form must be submitted alongside the P11D and this allows for employers to pay their NI on the BIKs.
For employees, income tax is charged on the BIK. The payment for this will be automatically deducted via your payroll and so there is nothing you need to do. However, when your employer provides you with a copy of the P11D, you should double check that the benefits and value have been reported as expected. If there are any discrepancies you will need to raise this with your payroll as soon as possible.
For more help and information please visit our payroll service page.