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Everything You Need to Know About Benefits in Kind

Everything You Need to Know About Benefits in Kind

If you’re a small business owner in the UK, you’ve probably heard the term “Benefits in Kind” (BIKs) thrown around. But what exactly does it mean, and how does it impact your business? 

Put simply, BIKs refer to perks or non-cash benefits that employees receive from their employer in addition to their regular salary. These benefits can range from company cars to gym memberships or private medical insurance, and while they’re great to offer, they do have tax implications you need to be aware of.

1. What is Benefits in Kind?

First things first, what is benefits in kind? Put simply, BIKs, also known as “fringe benefits” or “perks,” are non-cash benefits that employees receive as part of their compensation package. Instead of receiving money, employees might get other forms of value, like a company car, private health insurance, or even interest-free loans. Sounds like a great deal, right? Well, it is – until you remember the taxman.

The UK government views most BIKs as part of an employee’s overall earnings, meaning they’re taxable. That’s right – while your company car or free gym membership might feel like a bonus, it’s also something that HMRC wants a slice of. But don’t worry, not all benefits are taxed, and some can even come with exemptions.

Examples of Common Benefits in Kind:

  • Company cars and fuel cards
  • Private medical insurance
  • Living accommodation provided by the employer
  • Gym Membership
  • Interest-free or low-interest loans
  • Childcare vouchers
  • Use of company assets (e.g., laptops or phones used for personal reasons)

2. Tax Implications of Benefits in Kind

Here’s the catch: most BIKs are taxable. Employers are required to report these perks to HMRC, and employees might need to pay additional tax based on the value of the benefit they receive.

HMRC assigns a value to each Benefit in Kind, usually based on the market value or cost to the employer. Employees are then taxed on this value as if it were an additional salary. In some cases, the benefit could push the employee into a higher tax bracket, increasing their overall tax liability.

For employers, offering BIKs means additional reporting obligations. Every year, you’ll need to submit a P11D form to HMRC, outlining the value of any benefits provided to your employees. And, let’s not forget, you may also need to pay Class 1A National Insurance contributions on the value of these benefits.

A Quick Breakdown of Taxes:

  • For the employer: You’ll need to pay Class 1A National Insurance contributions on the value of Benefits in Kind provided.
  • For the employee: The value of the benefit is added to their salary. 

3. Which Benefits in Kind Are Tax-Free?

Not all BIKs are taxable – there are some that HMRC allows to be offered tax-free. These can be excellent perks for employees, while still saving the business money in taxes. Some of the most popular tax-free BIKs include:

  • Work-related training: Training that’s necessary for your job is exempt from tax.
  • Mobile phones: If the phone is given for work purposes, this is tax-free.
  • meals in a staff canteen: Lunch provided to staff in a workplace canteen are tax-free
  • Employee assistance programmes (EAPs): Confidential counselling services offered to employees are tax-free.
  • Trivial Benefits: Any benefit given to the employee (or Director) that cost less than £50, i.e. flowers or chocolates provided that the benefit is not in the form of cash or a cash voucher or related to workplace performance.  

Offering tax-free benefits can help small businesses attract top talent without increasing the overall tax burden for employees. It’s a win-win, especially when budgets are tight.

4. How to Calculate the Value of Benefits in Kind

The valuation can depend on various factors, such as whether the benefit is used personally or for work purposes.

For example, if you provide an employee with a company car, the value of the benefit depends on the car’s list price and its CO2 emissions. More environmentally friendly cars tend to have lower BIK rates. On the other hand, providing an interest-free loan to an employee will require you to calculate the benefit based on the interest they would have paid had they taken out a loan at market rates.

HMRC provides clear guidance on how to calculate this based on the type of benefit – learn how to calculate tax on employee’s company cars.

It’s essential to get these calculations right. Incorrect reporting could lead to fines or penalties from HMRC, and believe me, that’s not something you want to deal with. 

Simple Example: Company Car BIKs Calculation

  • List price of the car: £26,875
  • CO2 emissions: 127g/km
  • BIK rate: 30%
  • Taxable value: £26,875 x 30% = £8,063
  • This £8,063 is added to the employee’s salary for tax purposes.
  • Depending on the employees tax bracket, 20% tax would total £1,613

5. Are You a Small Businesses? Make the Most of Benefits in Kind!

As a small business owner, offering BIKs are incentives that can make your company more attractive to potential employees, especially if you can’t compete with larger companies on salary. However, it’s essential to balance the benefits you offer with the associated costs, including tax liabilities and administrative burdens.

Here are some tips on offering BIKs efficiently:

  1. Use tax-efficient benefits: Offer perks that come with little or no tax implications, such as mobile phones or job-related training.
  2. Review your P11D forms carefully: Make sure you’re accurately reporting the value of all Benefits in Kind to avoid penalties from HMRC.
  3. Communicate with your employees: Make sure they understand the tax implications of the benefits they’re receiving, so there are no surprises when their tax bill arrives.
  4. Get expert advice: Tax rules around BIK can be complex, and they frequently change. Working with an accountant can help you stay compliant while making the most of the benefits you offer.

Does this also apply to director only payroll? 

Yes, Benefits in Kind rules also apply to director only payrolls. If you’re a director and want to receive perks like private healthcare, a company car, or other non-cash benefits, these would still be considered BIKs by HMRC and must be reported accordingly.

Even if you’re the sole director with no employees, the same tax implications and reporting requirements apply.

Here’s how it works in a director-only payroll scenario:

1. Private Healthcare and Other Perks as Benefits in Kind

If you, as a director, receive private healthcare or other non-cash perks, HMRC treats these as taxable benefits. The value of the benefit is added to your overall income and taxed accordingly.

For instance:

  • If your limited company provides you with private healthcare, the value of this benefit is reported on a P11D form, and it becomes part of your taxable income.
  • You’ll pay tax on the value of the benefit, while the company will also have to pay Class 1A National Insurance Contributions on the value of the benefit.

2. Reporting and Compliance

You’ll need to report the benefits on your company’s annual P11D form and pay any relevant tax and National Insurance contributions. This applies regardless of whether the company has other employees or just you as the director.

3. Tax Considerations

Directors, like employees, can receive some tax-free or low-taxed benefits. However, most benefits (like private healthcare) are taxable. As a director, you might also want to explore more tax-efficient benefits like contributions to a pension scheme, which can have more favourable tax treatment.

Everything Directors Need to Know

Even if you’re running a small limited company with only yourself on the payroll, any Benefits in Kind you receive (such as private healthcare) are subject to the same tax rules and reporting requirements as they would be for regular employees. You’ll need to ensure that the correct tax is paid, and the benefit is reported accurately to HMRC.

If you’re unsure about how to handle BIKs for yourself as a director, it’s always a good idea to get expert advice to ensure you’re compliant with tax laws while making the most of available perks – our friendly team of local accountants in Bedford are here to help.

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