If you have a team of employees, you have several options for rewarding them in addition to paying wages or a salary. One of the most flexible options is to offer benefit in kind, also known as fringe benefits.
Benefit in kind take several different forms, which we’ll describe later, and they can be offered as additions to basic payment or as an integral part of a ‘package’ that can be tailored to the needs or preferences of individual employees.
Offering a benefit in kind as an integral part of a package or as an alternative to part of an employee’s salary may provide tax benefits for both the employee and your business. Some BIKs are tax-free while others may be taxable and incur additional National Insurance charges, so it’s important to take a careful look at both the advantages and tax implications before offering BIKs.
Definition of Benefit in Kind
A benefit-in-kind is anything of monetary value you provide to your employees that is not ‘wholly, exclusively, and necessary’ for them to perform their contractual duties. For example, if you give a vehicle to a delivery driver, a field service engineer or a sales representative, HM Revenue & Customs would consider the vehicle to be essential to their work.
That vehicle would not be considered a benefit in kind unless the employee made extensive private use of the vehicle. However, if you give a vehicle to an employee who does not need to travel on business, the vehicle would be considered a BIK.
Although there are many complex rules that cover different types of benefits, BIKs fall into two broad categories – taxable and tax-free. HMRC set out their basic https://www.gov.uk/tax-company-benefits on the their website.
Examples of Benefit in Kind
HM Revenue & Customs provide a brief list of https://www.gov.uk/tax-company-benefits/other-company-benefits-youll-pay-tax-on, including:
- Company cars for personal use
- Fuel for a company car for the employee’s personal use
- Accommodation provided rent-free or below market rent that is not essential for the employee’s job role.
- Clothing allowance that is not essential for the employee’s job role
- Private medical insurance
- School fees for employees’ children
- Interest-free or cheap loans to employees over £10,000
- Holidays or holiday vouchers
If you provide an employee with a vehicle that is essential to their job role, that is not a BIK and does not attract tax liability.
If you offer an employee a vehicle that they are allowed to drive for both business and personal use or only for personal use, that is a taxable benefit in kind. An employee who made occasional business trips would have tax and National Insurance liability based on the proportion of personal use.
When calculating a benefit in kind there are several factors, including:
- The list price of the car and any accessories
- The vehicle’s carbon dioxide emissions
- The type of fuel the car uses.
- The date of registration of the car
The taxable value of the vehicle is reduced if:
- The employee has it part-time
- The employee pays a contribution towards the cost.
- The vehicle has low CO2 emissions.
The taxable value for hybrid or electric vehicles is calculated in a different way. If the vehicle has CO2 emissions of 1 to 50g/km, value is based on the distance the vehicle can travel on electric power before its batteries need recharging.
HMRC provides information on https://www.gov.uk/tax-company-benefits/tax-on-company-cars on the government website.
There is also an HMRC http://cccfcalculator.hmrc.gov.uk/CCF0.aspx to help you work out the value of vehicle and fuel benefits.
Calculating a benefit in Kind
If you provide an employee with a benefit in kind that HM Revenue & Customs considers taxable, the employee will have to pay income tax on the financial value of the benefit – the ‘cash equivalent’ in HMRC terminology.
The amount of tax the employee pays will be based on their income tax band – 20, 40 or 45 percent.
With some taxable benefits in kind, such as vouchers or benefits paid as cash, employees may also incur an additional National Insurance charge.
If you are required to complete a tax return (self-assessment form SA100) then this need to be declared on their as this count as income.
If you provide benefits in kind to your employees, you will also need to pay tax in the form of Employer’s National Insurance of 13.8 % of the taxable value of the benefit.
On the upside, the cost of providing benefits in kind is an allowable tax-deductible expense which can help to reduce your profits for corporation tax.
Reporting Tax on Benefits
As an employer, you are responsible for reporting that employees have received benefits in kind. You report to HMRC by completing and submitting form P11D.
This form provides a long checklist of all possible benefits. You select any applicable benefits and enter the value. The deadline for submission is 6th July following the tax year in which the employee received the benefit.
You should also provide a copy of the form to the employee so that they can check your calculations and ensure that they pay the correct amount of any income tax or National Insurance contributions they must make. Any employee tax and National Insurance contributions are deducted through your payroll system.
You must also complete an additional form P11D(b), which relates to the benefit-related National Insurance contributions you must make. You submit this form at the same time as form P11D.
Offering your team members, a benefit in kind like private health insurance is a good way of rewarding them or even retaining them in the company.
One instance might be if a competitor offers them a competitive salary to yours but no private health insurance they may stay with the company.
Another example is if they are offered a company car, they do not have to purchase a car from their own bank account.