Basic Guide to Benefits in Kind: What You Need to Know Now
It’s possible that you’re receiving a benefit-in-kind if you receive any other benefits as part of your job in addition to your salary (BIK), or, if you are an employer you are offering them to your employees.
You may – often rightly- think of them as a workplace perk, or you may hear them referred to as “fringe benefits”. But you should be aware that while they may appear to be quite a nice bonus, even a reason to choose one position over another, they may not always be free. Not at least as far as HMRC is concerned.
That means that it’s important that employers who offer benefits in kind, and the employees that receive them, understand the tax obligations attached to them. Nothing kills the pleasure of a perk faster than a notice from HMRC demanding unpaid tax when you may not have realised it was owed in the first place.
What Counts as Benefits in Kind?
Access to a company car that an employee is also allowed to use for personal purposes – such as driving their children to school and going shopping – private medical insurance, or even free canteen meals are all examples of BIKs. In other words, anything given to an employee that isn’t “wholly, exclusively, and necessary” for them to perform their job duties is considered a BIK.
Why Offer Benefits in Kind?
Although they are perhaps not as generous as they were back in the 1970s and 1980s, benefits in kind are usually used by employers as a tool to attract, and then retain, the top talent they need to help their businesses grow and thrive.
Salary matching is a common practice in lots of business niches, so it is often the benefits in kind on offer that help a top employee prospect decide between two different positions. They might also be the reason they decide to stay, so, even though they technically represent an additional expense on the part of the employer, their ROI is often rather high in terms of staff retention and reduced turnover.
Which Benefits in Kind Can Be Offered Tax Free?
For the simple reason that they are tax-free, tax-free BIKs are one of the most common benefits you’ll come across in today’s work environments. As a result of these benefits, neither the employee nor the employer are required to pay any additional taxes, and as no-one likes to pay a penny more in tax than they really need to, this makes these BIKs even more popular.
While it’s not an exhaustive list – you can find one of those provided by HMRC here – here is a look some of the most popular options:
- Employer contributions to a workplace or personal pension plan that has been approved as such by the government.
- Subsidized canteen meals as long as they are available to all employees.
- Leisure facilities such as a gym, pool table, or other forms of entertainment are available on-site, again, as long as they are offered to all employees.
- Other on-site services, such as childcare, mental health services or other incidentals like personal fitness training.
- Staff parties as long as all employees are invited and the cost per person does not exceed £150 per year.
- As part of the Cycle to Work program, bicycles and cycling equipment (helmets, knee pads etc)
- Gifts for non-work-related occasions such as birthdays, weddings, or retirement (but the total value of these gifts should not exceed £250 in a single year)
- Trivial benefits worth less than £50 that are not cash or cash vouchers. Free coffee and tea provided in a break room is a common example of such a perk.
- The use of the office car park, provided all employees are offered a space (you can still maintain better parking for executives though)
- Uniforms or safety equipment that is required to complete the job.
What Benefits in Kind are Taxable?
So which BIKs does the government expect tax paid on? All the following benefits in kind, while often very desirable, are also taxable:
- A company car that an employee can also make use of for personal purposes. The total value of this benefit will be calculated using the car’s list price, its carbon dioxide emissions, the type of fuel it uses (with the exception of pure electric vehicles), and the car’s registration date.
- Fuel for a company car which an employer provides and which employees are free to use for personal purposes.
- Accommodation that is provided for free or at a reduced rate AND where employees are not required to live in order to perform their job duties.
- Non-specific regular clothing, also known as clothing allowance, referring to clothing that isn’t required for an employee to do their job, such as protective goggles. This is frequently defined as clothing that could also be worn outside of work.
- Private medical insurance
- Employees’ children’s school fees
- Interest-free or low-cost loans provided by a company or business to an employee for amounts greater than £10,000
- Holidays or holiday vouchers
How is the Tax Calculated on Benefits in Kind?
Depending on what benefit is being offered/received and how it has been administered, there are different and complex rules about what kind of tax must be paid and by whom. In general, BIKs are subject to income tax, employer’s national insurance, and employee’s national insurance.
You will be charged income tax if you receive a BIK as an employee. To figure out how much, multiply the taxable value of the benefit by your personal income tax rate band (20% for basic rate, 40% for higher rate, and 45 percent for additional rate), which HMRC defines as the cash equivalent. This means that if your gym membership costs your employer £600 per year and you are a basic rate taxpayer, you will have to pay 20% of £600 in income tax on this benefit.
Employers who offer BIKs to their employees must also pay tax in the form of employer’s NI, which is currently 13.8 percent. This is applied to the benefit’s taxable value once more. The cost of providing BIKs, on the other hand, is a tax-deductible expense that can be deducted from profits for corporation tax purposes. Employers may choose to offer BIKs as a less expensive alternative to paying employees a higher salary.
Although an employee may be required to pay income tax on the BIK, they will not be required to pay NI on it in most cases, resulting in a tax savings. To avoid attracting employee NI, it is critical to administer BIKs in such a way that the employee does not receive cash or an equivalent, such as vouchers, as this will be considered earnings and subject to both income tax and employee NI.
How is Benefits in Kind Tax Reported and When is it Due?
It is the employer’s responsibility to declare the BIKs that have been received by employees. They must do so by completing and submitting the P11D form to HMRC by the 6th of July following the tax year in which the benefits were received. If an employee received BIKs between April 6, 2019 and April 5, 2020, the P11D form deadline would be July 6, 2020. The form provides a list of all possible benefits from which the employer can choose the ones that are relevant to the employee and state the value of the benefit provided. A copy of this form should be given to the employee as well.
Employers must also fill out the P11D(b) form, which is available on the HMRC Government Gateway. Employers can pay their National Insurance contributions on the BIKs if they submit the P11D(b) form along with the P11D.
The BIK is subject to income tax for employees. There is no need for you to do anything because the payment will be deducted automatically from your paycheck. When you receive a copy of the P11D from your employer, you should double-check that the benefits and value have been reported correctly. If there are any discrepancies, you must notify your payroll department as soon as possible.
Benefits in kind, while great for lots of reasons, can cause some serious tax headaches if not managed properly, both for the employers that pay them and the employees that receive them. To avoid these professional help is always the best way to go if you are in any way unsure about what you are doing. Pearl Lemon Accountants can offer such help. Contact us today to learn more.