How much tax do you pay on benefits-in-kind?

Nowadays, finding the ideal workplace is no longer predominantly based on just the salary offered. Many employers will offer additional incentives to attract new employees, as well as keep them in their roles for longer. This is perfectly legal, so long as it is taxed correctly. This is where this article comes in, to explain the tax rules on benefits-in-kind. Continue to read to find out what this means for you, whether you’re an employer or employee.

What is a benefit-in-kind?

A benefit-in-kind (BIK) can be anything with monetary value given by an employer that is in addition to the employee’s salary. You may see it as a workplace perk, or they are sometimes referred to as ‘fringe benefits’. Depending on the benefit, it may not necessarily come to you for free and can attract income tax for the employee and National Insurance (NI) contributions for the employer.

If you are not employed, but instead generate income through self-employment, and you receive payment in other means which are not cash but have monetary value, then this is known as payments-in-kind.

What are tax-free benefits-in-kind?

Some workplace benefits are tax-free, and these are usually the most common benefits that you will come across – for the very reason that there is no substantial extra cost to either the employer or employee. Tax-free benefits include (but are not limited to):

• Employer contributions to a workplace pension or private pension. Whilst there is a legal minimum that employers must contribute where an employee opts into the workplace pension, there is no legal maximum. That means that employers are free to contribute as much as they wish. Some more generous workplaces may offer to match whatever the employee wishes to put into their pension pot.   
• Annual health screenings, medical check-ups or flu jabs can be offered as a tax-free BIK so long as it is paid for by the employer directly. Where it is paid for by the employee, who is then later reimbursed, this invalidates the tax-free rule and then becomes taxable. Employers should be aware of this rule and be careful when offering these kinds of benefits.
• Counselling or other well-being services. Since April 2020, employers are able to provide such benefits as part of staff welfare programmes so long as they are available to all employees.
• Christmas or other annual parties where the cost is no more than £150 per individual. The £150 limit applies for the entire year and is not calculated per person per event.
• Workplace parking, either at the workplace or nearby, is an allowable tax-free benefit. What’s more, unlike other BIKs, there is more flexibility when it comes to parking. For example, parking spaces do not have to be available to all employees. Employers can either operate a first come, first serve basis, or even choose to have designated parking spaces for select employees such as directors/partners only. The payment for parking can either be paid directly by the employer (such as if they rent car parking spaces) or be paid in first instance by the employee and then reimbursed later by the employer. However, it is important to note that any parking fines cannot be paid for as a tax-free BIK. Finally, parking does not necessarily have to be used for work purposes. For instance, employees may be entitled to use the parking spaces during the weekends for personal leisure.
• Trivial benefits which are less than £50 in value and are not cash or cash voucher such as free tea and coffee, fresh fruit, or morning pastries. Even subsidised or free meals served in the workplace can be offered tax-free so long as they are not seen as excessive and are offered to all employees.
• Use of on-site facilities such as gym, pool table, cinema room, or other entertainment for staff. Again, these shouldn’t be considered excessive.
• Any uniform or safety equipment that is provided which is necessary for you to complete your job. This further extends to any office equipment such as desk, office chair, monitors, or printers where the employee is required to work remotely from home or has hybrid working arrangements.
• Bicycles or any cycling equipment needed as part of the Cycle to Work scheme.

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 them up with free benefits, the government imposes 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 (including your regular commute to and from work) and where it may be parked at your own private residence overnight. The amount of BIK tax you will need to pay is based on the list price of the car, its carbon dioxide emissions, and the employee’s own personal income tax band. The employer will need to pay 13.8% of the BIK tax value as NI contributions.
• Fuel that is paid for by the employer for company cars that employees can use for personal travel is subject to tax. However, if the employer requires the employee to keep mileage records between business travel and personal travel, and only reimburses an employee for business travel, then this is not seen as a benefit. Any fuel reimbursement paid to employees for business travel in their own personal vehicle can become a BIK where it is above the HMRC provided  allowance. The rules are different for electric vehicles however, and providing a charge for electric cars at the work place is tax-free.
• Private medical insurance or healthcare that is paid for by the employer is a taxable benefit. However, where an employer can arrange cheaper medical cover because a large number of employees are interested in the benefit, then this can be tax-free so long as the employees pay for the policy themselves. 
• Loans from an employer which are considered to be interest-free or charged at a cheaper-than-usual rate.
• Accommodation which has been provided rent-free or below market rent AND where the employee is not required to live there in order to perform their work duties

What is the difference between a benefit-in-kind and salary sacrifice?

Both BIKs and salary sacrifice schemes are ways in which employees can receive benefits that are in addition to their salary from their employer. However, salary sacrifices are different in the way they are administered and taxed. A salary sacrifice agreement can only be made through an amendment in the employee’s employment contract as they must also agree to forgo a part of their salary in exchange for the benefit. This type of arrangement means that both the employer and employee pay less tax, whilst still being able to offer/receive a benefit. However, only a small number of benefits can be offered in this way to prevent abuse of the system which allows valuable benefits as well as tax-cuts.

Employers can still offer BIKs without requiring an employee to sacrifice a part of their salary, but depending on the benefit in question, may or may not attract income tax and NI as explained above. Employers can also choose to offer a hybrid arrangement, which is mostly used when offering a company car that attracts BIK-tax because the employee can use the car for personal travel. A hybrid arrangement would still involve an employee agreeing to sacrifice a part of their salary in exchange for the benefit, and whilst it would still attract BIK-tax, it would be less so as a result.

To summarise, a pure salary sacrifice arrangement is an HMRC-approved scheme where employers can offer employees a specific type of benefit without it attracting income tax and NI in exchange for a reduction in the employee’s salary. BIKs are any type of benefit offered by an employer with monetary value in addition to an employee’s salary and may or may not attract income tax and NI depending on the benefit.

What are the advantages of benefits-in-kind?

For employers, the advantage of offering BIKs is that it can enhance an employee’s compensation package in addition to the salary on offer. This can often improve your chances of attracting new employees for vacant positions and provide a competitive edge over other recruiters. BIKs do not have to be extravagant to have an advantageous impact, and simple benefits such as staff parties can boost staff morale, improve staff retention, as well as help reduce your corporation tax liability. Finally, you may want to consider how health and wellbeing BIKs such as gym membership, dental insurance, and private healthcare may even help to reduce staff sickness and absences, therefore improving business productivity.

For employees, the advantage of receiving BIKs from work is that many benefits would often cost more if you were to purchase them directly yourself. This is because workplaces are often able to receive corporate packages where the prices are reduced as they buy in bulk to cover numerous employees. Not only that, but you would also save on NI contributions compared to if you were simply paid the additional amount to purchase the benefit yourself.

What are the disadvantages of benefits-in-kind?

For employers, one of the main disadvantages of offering BIKs to staff is the extra administrative duties which falls upon the payroll process. Not only do you need to ensure you have reported the appropriate benefit value, accurately calculated the BIK tax due, and allocated the correct PAYE tax code, you will have to complete an annual P11D(b) form at the end of each tax-year.

In addition to paying for the cost of the benefit, you should also factor in that there will be Employer’s NI to pay as well. This is calculated as 13.8% of the value of the taxable benefit, but is of course, corporation tax deductible.

For employees, the key disadvantage to receiving BIKs is when they are taxable at your personal income tax band. Depending on the benefit in question, it may not always be worthwhile to accept. A good example of this is where your employer offers a petrol or diesel company car that you can use for personal travel but has high emission rates. You may well find that you would simply be better off using your own personal car and then reclaiming business travel mileage where applicable. However, electric cars may be the exception to this as they have far more favourable tax rates.

Furthermore, BIKs can also push you into the higher tax brackets. If you’re already close to the higher tax threshold and earning £49,000 per year, then receiving private medical care worth £3,000 will mean you will have to start paying 40% tax on £1,930 of your income.

Finally, BIKs are usually discretionary, which means that your employer can remove them at any point they wish, unless it has expressly been included in your employment contract. If you’re particularly reliant upon a company benefit, then this could leave you a bit stuck. Benefits are also tied to your employment, so if you decide to change jobs in the future, you may not be so lucky as to be offered the same benefits again.

How do I calculate how much tax needs to be paid on a benefit-in-kind?

There are different and complex rules on what kind of tax needs to be paid, and by whom, 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 benefits-in-kind?

BIKs need to be reported to HMRC by employers. You are able to do so in two ways:

1. Complete the annual P11D form

The P11D form must be completed by the 6^th of July the following tax year in which the benefits were received. If an employee was in receipt of BIKs between 6 April 2023 to 5 April 2024, the P11D form deadline would be 6^th July 2024. The form includes a list of all possible taxable BIKs for you to select from, and then you must include the equivalent cash value alongside to declare to HRMC. A separate form must be completed for each employee/director that receives a BIK. Within the P11D form, an adjustment will be made to the employee’s tax code to account for the BIK and therefore a copy of the form should be provided to them in order for them to verify that they have been allocated the correct tax code. This will then enable them to complete a self-assessment tax return form in order for them to pay the tax due on their BIK.

2. Payroll benefits-in-kind

Alternatively, since 2016, employers can choose to payroll BIKs instead. This has become a preferred method of reporting and paying for BIKs for many employers as it is less time consuming and labour intensive than completing the P11D form. To do this, you must register with HMRC before the start of the tax year in which you need to report the BIK. For example, employers must register by 5^th April 2024 in order to add BIKs onto their payroll for the 2024/25 tax year. When you payroll BIKs, you treat the cash equivalent value of the benefit as part of the employee’s taxable income. This is then divided into the regular pay periods for the year and tax is automatically deducted, similar to how income tax on their salary would be deducted. Reporting BIKs in this way removes the need to complete the annual P11D form and the need for the employee to complete a self-assessment tax return to pay their tax.

In addition to reporting the BIK tax, employers are required to complete a P11D(b) form annually each year too. This is regardless of which method you decide to use to report the BIK tax because the P11D(b) form is intended for you to declare and pay for your employer’s Class 1A NI on the BIK. This is also due every 6^th of July proceeding the tax year in which the benefits were issued.

Get help with benefits-in-kind

If you’re an employer and unsure of how to administer BIKs then why not speak to us about how we can support you and your team with our payroll service? Our payroll service is fully comprehensive and will not only cover your BIK reporting but also other statutory requirements such as the workplace pension, NI contributions, and employment allowance if applicable. Use our contact form to get in touch for a quote.