Benefits in Kind
Many business owners want to keep their team happy by providing staff with benefits in excess of their salary. While this is great for morale, it does have tax implications that need to be considered in the form of ‘Benefits in Kind’. This article provides a general overview of ‘Benefits in Kind’ to give business owners an idea of how they work and what the tax implications are when providing benefits to their employees.
What are Benefits in Kind?
Benefits in Kind (BIK) are purchases made by a business from which an employee receives some form of personal benefit. They can be in the form of goods, services or access to facilities. For example, company cars, private health insurance and employee gym memberships are all forms of BIK.
As BIK aren’t cash payments made to employees, they don’t form part of salary payments on an employee's payslip, so aren’t included on typical payroll submissions or payslips each month.
How are Benefits in Kind taxed?
Tax is due on employees’ employment income. This is defined to include not only cash earnings but also ‘amounts that are treated as earnings’. BIK are amounts that are treated as earnings, and so are usually subject to both income tax and national insurance.
The employee will pay income tax on the value of the benefit. The rate of which depends on the total taxable income of the employee each year. Basic rate taxpayers pay income tax at 20%, those in the higher rate at 40% and those in the additional rate at 45%.
The employer pays Class 1A National Insurance at 13.8% on the value of the benefit whenever the total income for the employee is greater than HMRC’s secondary threshold of £8,840 per year for the tax year 2021/22.
How are Benefits in Kind valued/measured?
BIKs are usually measured by the cash equivalent of the benefit less any amount made good (repaid) by the employee to the employer. For example, if a monthly gym membership is £50 and an employee contributes £10 per month towards this, then the value of the benefit would be £40 per month.
Certain BIKs, such as the use of company assets and/or company cars, are more difficult to value than others. This is because payments made for the benefit might not align with the period that the employee has access to the benefit. For example, an asset might be owned by the business for a number of years, while the employee may only have access to it for a limited period of time.
Is there any advantage to paying for BIK expenses via a limited company?
If you’re a director/shareholder of a company, then, in short, there is usually no tax advantage to paying for benefits in kind via your limited company. The reason for this is that you still pay income tax, and the company pays employers’ national insurance on the value of the benefit, whereas if you took a dividend, the company would pay a reduced rate of income tax, and there would be no employers’ national insurance on the value.
However, if you are an employee (or have employees) then there may be an advantage by having a salary sacrifice arrangement whereby you reduce an employees salary by the amount of the benefit and the company then pays for the benefit.
The advantage to this is that no employee's national insurance is due on this portion of the salary, however, the company will still owe employers national insurance and incur the associated expense, so there is no advantage to the company.
Please note that employees' national insurance is 0% on the first £797 of monthly salary and then 12% on it between £797 and £4,189 and then 2% thereafter.
Therefore if an employee earns <£797/month there is no national insurance saving and if they earn between £797 and £4,189 then the saving is 12% and beyond £4,189 the saving will be 2%.
How to Report Benefits in Kind?
Benefits in Kind are usually reported to HMRC via form P11D once per year.
Deadlines for P11D
You must submit form P11D to HMRC by 6th July following the end of the tax year.
You must pay HMRC any class 1A National Insurance due from the P11D submission by 22nd July following the end of the tax year.
Records for Employees
Any form P11D submitted must be shared with the employee in question no later than the 6th of July following the end of a tax year.