Benefits in Kind Tax: A Guide for Employees and Employers

Benefits in Kind Tax: How Does it Work?

Despite the slightly confusing name, Benefits in Kind are extra perks that employers can provide to their employees. They are non-cash benefits, so think company cars, private healthcare, gym memberships or wellness programs.

Unlike a standard salary or wage, benefits in kind are offered as a way of attracting and retaining the best staff. Unfortunately, like most things, benefits in kind are still taxed, but each type will have their own unique calculation.

In this article, we’re going to attempt to uncover the different tax treatments for benefits in kind, so whether you’re an employee or an employer – you’ll have a better understanding of how it all works.

Understanding Benefits in Kind Tax

Explanation of How Benefits in Kind Are Taxed

When it comes to the tax placed on benefits in kind, each benefit will be taxed slightly differently. However, as a general rule of thumb, the value of the benefit is added to the employee’s income, and they are taxed accordingly. How these values are calculated also differs. Take a company car, they are usually taxed based on their C02 emissions along with their list price, whereas accommodation would be taxed based on the rental value. Of course, we’ll dive into this in more detail, so stay tuned.

The role of HMRC in regulating benefits in kind tax

HMRC oversees the tax treatment of all benefits in kind and provides guidelines on how different benefits should be valued and reported.

It’s the employer’s responsibility to comply with HMRC’s regulations by correctly calculating the taxable value of each benefit in kind. This typically involves completing and submitting Form P11D for each employee who receives benefits in kind. What happens if the employer miscalculates the tax? Well, if an employer fails to report benefits in kind correctly or on time, they could be hit with penalties including fines and interest on unpaid taxes.

 

Examples of Common Benefits in Kind:

• Company Cars: Vehicles provided by an employer for personal use.
• Private Healthcare: Health insurance or medical services paid for by the employer.
• Accommodation: Housing provided by the employer, such as a company flat or house.
• Interest-Free Loans: Loans given by the employer with no interest or a lower interest rate than the market rate.
• Mobile Phones: Phones provided for personal and work use without any cost to the employee.

Differences Between Cash Benefits and Benefits in Kind:

• Cash Benefits: Direct payments made to employees, such as bonuses, which are taxed as income.
• Benefits in Kind: Indirect compensation that provides value but not in the form of cash. These benefits often require valuation to determine their taxable value.

Reporting Benefits in Kind to HMRC

So how does it work for employers? What must they do concerning HMRC?

Employers need to report benefits in kind to HMRC using forms such as the P11D, which lists out the benefits given and their taxable values. It also includes important details like employee info, benefit types, and cash values for accurate tax assessment.

(To find out more about P11Ds, check out our blog exploring the topic).

Employers also need to pay Class 1A National Insurance on most taxable benefits and ensure everything is submitted by the July 6th deadline. Staying on top of these reports and sharing the details with employees, is incredibly important as it helps avoid penalties and keeps everyone informed. This, combined with maintaining clear records and communicating openly about the tax side of benefits means you’ll stay compliant, while effectively planning your tax.

 

Calculating Benefits in Kind Tax

As an employer, it’s your responsibility to calculate benefits in kind so you don’t get hit by fines from HMRC. However, don’t panic, with the help of an accountant such as ourselves, you can make sure your calculations are made correctly so you don’t have to stress. Check out our simplified step-by-step guide to calculating benefits in kind:

1. Identify the Benefit: Determine what benefits have been provided.
2. Value the Benefit: Use HMRC guidelines to ascertain the value of each benefit.
3. Aggregate the Values: Add up the values of all benefits received by the employee.
4. Determine Taxable Amount: Include the total value in the employee’s taxable income.
5. Apply Tax Rates: Calculate the tax based on the employee’s overall income, including the value of the benefits.

HMRC gives you access to online calculators if you’d like to calculate your benefits in kind yourself. Or, if that still feels confusing, feel free to get in touch and we’ll walk you through the process. Shortly, we’ll go into some detail about the different kinds of benefits in kind and how they’re taxed, but first, let’s explore payrolling benefits in kind and how it can benefit employers and employees.

 

Payrolling Benefits in Kind

In a nutshell, payrolling benefits in kind allows employers to pay their tax bill for the benefits as they go, spread out across the year rather than in one hefty sum at the end of the tax year. How? By including the value of the benefits in the employee’s taxable pay each month. This way, employees pay tax on their benefits as they go, rather than getting a bill at the end of the tax year. This was introduced in 2016 as a way to improve the taxpayer’s experience, and by 2026 it will become completely mandatory to payroll benefits in kind.

What will change when it becomes mandatory?

At the moment, employers must fill in a p11d or a P11D(b) by the 6^th July after the end of the tax year.

Taking into account the information on the P11D, the employee pays income tax through either a self-assessment, or HMRC adjusting the PAYE code to account for the difference. Employers have to pay the Class 1A National Insurance Contributions (NIC) to HMRC by July 19th after the tax year ends, or by July 22nd if they’re paying electronically.

That said, with approval from HMRC, employers can choose to handle income tax withholding for most benefits directly through payroll.

This approach eases the reporting workload since P11D forms are only needed for benefits that can’t be included in payroll (like accommodation and certain loans). However, employers still need to submit a P11D(b) form.

In theory, payrolling benefits will help both employers and employees by simplifying tax management and reducing administrative burdens. For employers, it means less paperwork since they no longer need to submit detailed forms for each benefit at the end of the year. Instead, taxes on benefits are handled in real-time through payroll. For employees, this spreads out tax payments over the year, making it easier to manage finances and avoid chunky, unexpected tax bills. Overall, payrolling benefits makes the tax process smoother and more predictable for everyone involved.

Of course, if you need any more assistance around payrolling benefits, speak to our tax team today.

How to Register for Payrolling with HMRC: To get started with payrolling benefits in kind, employers must register with HMRC before the beginning of the tax year. With the mandatory date looming, it would make sense for employers to get ahead of the curve and register as soon as they can.

This registration is incredibly straightforward and is done online through the HMRC website. By doing this, employers inform HMRC that they will be taxing benefits through payroll, and HMRC will adjust the employees’ tax codes accordingly. It’s an easy process that sets everything in motion for smoother, more efficient tax management, what more could you want?

Common Benefits in Kind and Their Tax Implications

So we’ve covered what benefits in kind are, and how they are treated generally from a tax perspective. But what about the specifics? What actually classes as a benefit in kind and what is the tax treatment for each of these items? Let’s get into it:

Taxable Benefits in Kind:

• Company Cars: If an employer provides a car to an employee, the value of this benefit is typically taxable. The taxable value can be calculated based on the car’s list price, its CO2 emissions, and other factors. Check out our tax guide to company cars here.
• Accommodation: Providing housing or accommodation to an employee is usually a taxable benefit, unless it’s necessary for the job or the accommodation is of a very low value.
• Private Health Insurance: Premiums paid by the employer for private health insurance for the employee are often taxable.
• Non-Cash Gifts and Vouchers: Any non-cash gifts or vouchers given to employees are usually considered taxable income.
• Personal Use of Assets: If employees use company assets for personal purposes (e.g., computers, mobile phones), the value of this personal use may be taxable.
• Meals and Entertainment: Providing free or subsidised meals or entertainment can also be a taxable benefit.

Exempt Benefits in Kind:

• Pension Contributions: Employer contributions to registered pension schemes are often exempt from income tax.
• Work-related Training: Costs associated with work-related training provided by the employer may be exempt.
• Employee Discounts: Small discounts provided to employees on goods or services sold by the employer may be exempt up to a certain threshold.
• Workplace Amenities: Basic amenities provided on the employer’s premises, such as tea and coffee, may be exempt.
• Business Travel: Expenses related to business travel, including accommodation and meals, are typically exempt if they are incurred wholly and exclusively for business purposes.

 

Benefits in Kind for Employees

For employees, payrolled benefits in kind should smooth out the whole process, requiring less need for filling out forms, and no more shock-tax bills. Here’s how:

Regular Tax Deductions:

• Employees will see the tax on their benefits in kind deducted from their pay throughout the year, helping them budget and plan with no unexpected tax bills at the end of the tax year.

Updated Payslips:

• Payslips will include details of the benefits in kind and the relevant tax deduction, providing employees with a clear view of their compensation package.

Adjusted Tax Codes:

• HMRC will adjust employees’ tax codes to reflect the payrolling of benefits to ensure that the correct amount of tax is deducted throughout the year. Checkout our full list of tax codes here.

Simplified Year-End Process:

• Employees will no longer need to wait for P11D forms to understand their tax liabilities related to benefits in kind. Everything will be handled through the regular payroll process.

 

Benefits in Kind for Employers

Sounds fairly straightforward? Well what about for employers? Well, let’s have a look shall we?

Easy Reporting Process:

• The administrative burden of end-of-year reporting will be cut in an instant. Yep, that means no more long hours filling in and submitting P11D forms for payrolled benefits.

Real-Time Taxation:

• Employers will include the value of benefits in kind in employees’ taxable pay each payroll period meaning tax is deducted as the benefits are provided. That way, you’ll be compliant with tax obligations in real-time.

System Adjustments:

• Payroll systems will need to be updated to handle the inclusion of benefits in kind. Employers might need to invest in payroll software or updates to existing systems to ensure accurate processing. Speak to our team if you’d like to bring your payroll into the 21^st Century.

Communication and Training:

• With any big change, employers will need to communicate them clearly to employees and provide training or resources to help employees understand the new system.

Cash Flow Management:

• Employers might experience changes in cash flow due to the regular deduction of tax on benefits rather than lump-sum payments at the end of the tax year. It’s a win-win.

Conclusion

So there you have it – an introduction to the world of benefits in kind. Hopefully, you’ll have picked up some useful tips that you can take into your own business that may just save you a lovely bit of tax.

To get even more useful information like this, get in touch with our team who’ll be able to help you with all your tax and payroll needs, saving you a pretty penny in the process.