First published on Friday, September 27, 2024
Last updated on Friday, September 27, 2024
Offering attractive compensation packages is key to recruiting and retaining top talent. While salary is important, many employees place significant value on additional perks, known as a benefit in kind (BIK).
These non-cash benefits offer a range of advantages for both yourself as an employer and your employees, but it’s essential to understand the tax implications and reporting obligations tied to them. Especially, if you’re thinking about payrolling your benefits in kind.
What are benefits in kind?
Benefits in Kind are non-cash perks that employers provide to their employees, which have monetary value. These could be anything from a company car, private health insurance, or even subsidised meals.
While these benefits add value to an employee’s compensation package, they are considered taxable by HMRC, meaning the employee must pay tax on the benefit, and you may also have to pay National Insurance contributions (NICs).
Common types of benefits in kind
Some of the most popular BIK that UK employers offer include:
Company cars
One of the most well-known benefits, a company car can be an attractive perk for employees who frequently travel for business. However, it is subject to tax based on the car’s CO2 emissions and the list price.
Private medical insurance
Health insurance coverage, often provided to senior staff or as part of a wider benefits package, ensures employees can access private healthcare when needed. This is a taxable benefit for the employee.
Interest-free loans
Offering employees an interest-free or low-interest loan, such as for season tickets or a bike purchase, is another common benefit. If the loan exceeds £10,000 in a tax year, it is taxable.
Living accommodation
Providing employees with rent-free or subsidised housing can also qualify as a BIK. The amount of tax you pay depends on the property’s market value and other factors like utilities provided.
Childcare vouchers
Some employers offer childcare vouchers to help employees with young children cover childcare costs. While this scheme is closed to new applicants, some employees still benefit from it, and it remains a taxable benefit.
Gym memberships
Many employers offer discounted or free gym memberships to promote employee wellbeing. While a popular benefit, it is taxable unless specifically exempt under health-related schemes.
You can find a full list of taxable BIK’s on the UK government website.
How are benefits in kind taxed
HMRC treats most Benefits in Kind as taxable income. Both you and the employee may need to pay tax and NICs on these perks, depending on their nature.
Here’s how taxation works for BIK:
Employee Tax
Employees must pay income tax on the value of the benefit they receive. This is usually done via a change to their tax code, or if you use payrolling, the tax is deducted throughout the year via PAYE.
Employer NICs
As the employer, you are responsible for paying Class 1A National Insurance on the value of most taxable benefits. This is calculated based on the total value of the benefits you provide over the tax year.
Reporting benefits in kind
If you offer Benefits in Kind, you must report them to HMRC at the end of the tax year, typically through a P11D form. This form outlines the taxable value of each benefit provided to individual employees.
Additionally, you must submit a P11D(b) form to declare how much Class 1A NICs you owe on those benefits.
However, if you payroll benefits, you can reduce your reporting obligations by including the taxable value of benefits in the employee’s regular payroll, meaning they pay tax on them throughout the year. This allows you to avoid filing individual P11D forms for payrolled benefits.
Payrolling benefits in kind
One way to simplify the tax process around BIK is to opt for payrolling benefits. When you payroll benefits, the tax is collected in real-time through PAYE rather than making adjustments at the end of the year.
This offers a range of benefits for both you and your employees. See unlocking payrolling benefits in kind for tax savings to learn more about payrolling your benefits in kind.
To payroll BIK, you must register with HMRC before the start of the tax year. Once registered, you include the value of the benefit in employees' taxable pay, simplifying the process for everyone involved.
Tax-free benefits in kind examples
Not all Benefits in Kind are taxable. There are certain benefits that HMRC deems tax-free, which makes them an appealing option if you’re looking to enhance your employee offerings without additional tax burdens.
These include:
Employer Pension Contributions: Contributions made by you to an employee’s pension scheme are not subject to tax or NICs, making this a very tax-efficient benefit.
Workplace Parking: Providing free or subsidised parking at or near the workplace is tax-exempt.
Bikes and Cycling Equipment: Through the Cycle to Work Scheme, you can loan bikes and cycling safety equipment to employees, tax-free.
Mobile Phones: Giving an employee a mobile phone for personal and business use is also exempt from tax, provided the phone is owned by you and primarily for work use.
You can find more examples in our guide to employee benefits.
Maximizing the benefits of BIK for employers
Offering benefits in kind can help you attract and retain talent, but you also need to be mindful of the associated tax implications.
Here are some ways to maximise the advantages of offering BIK:
Offer a mix of tax-free benefits
Wherever possible, focus on offering tax-free or low-tax benefits to minimize both your and your employees' tax liabilities.
Communicate clearly
Ensure that employees understand the value of the benefits they receive, including any tax they may owe. Transparent communication can help avoid confusion or dissatisfaction later on.
Consider payrolling
Payrolling simplifies the tax process for both you and your employees, making it easier to administer Benefits in Kind and helping employees avoid large year-end tax bills.
Optimise employee wellbeing
Many BIK, like gym memberships or private healthcare, directly enhance the wellbeing of your employees. These perks can reduce absenteeism, improve morale, and boost productivity.
Start payrolling your BIK with BrightHR Payroll
Benefits in Kind are a powerful tool for UK employers, allowing you to offer valuable perks that go beyond traditional salary. While they come with tax implications, they can be managed effectively through payrolling or by focusing on tax-free benefits.
At BrightHR we’ve made this process simple, once registered with HMRC, and you’ve set up your payroll software. Simply input all the taxable benefits you provide and associate them with the relevant employee—then the software does the rest.
By carefully structuring your BIK offerings and understanding how they impact your tax obligations, you can provide competitive compensation packages that attract top talent while keeping costs under control.
If you’re not yet offering Benefits in Kind or haven’t considered payrolling, now may be the time to explore how these options can benefit both your business and your employees.
Book a free BrightHR Payroll demo today and see for yourself how we can help you accurately payroll your Benefits in kind.
