Companies often offer employees a variety of non-cash benefits, commonly referred to as "Benefits in Kind" (BIK). These benefits range from company cars to healthcare services, and although they are not paid directly in cash, they have an inherent monetary value.
Both employers and employees are subject to tax considerations on Benefits in Kind, therefore it is important for a limited company contractor to understand the rules.
What are Benefits in Kind?
Benefits in Kind are non-cash perks provided to employees by their employer as part of their employment package. They are separate from salary payments, as they are provided in addition to wages and typically include items like private healthcare, company cars, loans, gym memberships, and other services or items of value.
These benefits are usually offered to attract and retain talent, increase employee satisfaction, and support work-life balance. However, since they provide a benefit to the employee, they may also be subject to tax, both for the employee receiving them and the employer providing them.
Types of Benefits in Kind
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Company Cars: A company car is one of the most common BIKs in the UK. Employees may be given a car for business and personal use. The tax liability is based on the car’s value, CO2 emissions, and fuel type.
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Fuel Cards: In addition to company cars, some employers offer fuel cards that employees can use for business and personal travel. Tax is charged on the private use of fuel, and the employer is responsible for reporting the value of fuel used privately.
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Private Health/Medical Insurance: Many employers provide private health insurance as a BIK to help employees cover the costs of private medical care. This benefit is taxable based on the cost of the insurance premium, which is paid by the employer.
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Loans: Interest-free or low-interest loans offered to employees/directors are also considered a Benefit in Kind. The benefit is calculated by comparing the loan’s interest rate with the official rate set by HMRC (2.25% for 24/25), and the difference between the two is taxed as a BIK.
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Gym Memberships: Employers may offer gym memberships or subsidised fitness programs to their employees. While these benefits can improve employee well-being and satisfaction, they are taxable in some circumstances, particularly if the membership is available for personal use outside of work hours.
Tax Treatment of Benefits in Kind
While Benefits in Kind are valuable, they are subject to taxation. The rules for taxing BIKs depend on the type of benefit, the specific circumstances, and the employee's income level. Below are the key tax considerations for both employers and employees:
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Taxable Value of Benefits: The taxable value of a Benefit in Kind is typically determined by HMRC guidelines and is based on the market value of the benefit. For example, the tax due on a company car is calculated based on its List Price (the car’s cost when new) and the CO2 emissions. The taxable benefit is a percentage of the car’s list price, adjusted for its CO2 emissions and whether the car is used for personal travel.
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Reporting and Paying Tax: Employers are responsible for reporting Benefits in Kind to HMRC through a P11D form or the PAYE system (if the benefit is taxed through payroll).
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National Insurance Contributions: Benefits in Kind are also subject to National Insurance Contributions (NICs) for employers. Employers are liable for Class 1A NICs, which are calculated on the value of the benefit.
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Exemptions and Allowances: Some Benefits in Kind are exempt from tax or have tax-free allowances. For instance, workplace nursery care or gym facilities offered on-site are typically exempt from tax, provided they meet specific criteria. Similarly, if an employer provides an employee with a bicycle for commuting under a cycle-to-work scheme, the benefit is usually tax-free.
Employer Responsibilities
Employers have a legal requirement to:
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Report BIKs accurately: Employers must submit a P11D form at the end of each tax year detailing any Benefits in Kind provided to employees.
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Calculate the taxable value: Employers must determine the appropriate tax value for each Benefit in Kind and ensure accurate reporting to HMRC.
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Pay National Insurance Contributions: Employers must pay Class 1A NICs on taxable Benefits in Kind.
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Deduct taxes from payroll: In some cases, employers must make adjustments to employees’ payroll to account for tax due on certain Benefits in Kind.
Employee Considerations
For employees, understanding the tax implications of receiving Benefits in Kind is important, as the value of the benefit is usually added to their income when calculating their total tax liability. Employees should:
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Consider the value of the benefits: The monetary value of BIKs can impact an employee’s overall tax liability, especially if they receive high-value benefits such as a company car.
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Be aware of reporting obligations: While the employer handles reporting, employees must be aware of the tax impact and ensure that the benefit is properly recorded and that any additional taxation is paid.
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Factor in the cost of BIKs: Employees should understand that some benefits, such as fuel or private healthcare, can lead to additional personal costs.
How does Benefit in Kind impact Contractors?
As limited company contractors are owner-managers, they must consider both the employer and employee tax positions when evaluating the impact of benefits and taxation. This dual perspective means that not all benefits provided by the company are tax-efficient.
For example, certain benefits like trivial benefits, which have an exemption, or an electric company car, which is treated more favourably and can be funded by the company in a tax-efficient manner.
However, benefits like a gym membership, which are taxable, may not be as advantageous for the contractor to provide through the company. It’s important for contractors to carefully assess these options to ensure that the benefits they receive are tax-effective and aligned with their financial goals. Should you require specific advice on a certain benefit, please do not hesitate to reach out to your dedicated accounts team to discuss.
