When it comes to compensation, most people think of their salary, but many employers also provide something called Benefits in Kind (BIK). These are perks or extras that come in addition to your regular pay and can enhance your overall compensation package.
What are Benefits in Kind?
Benefits in kind are non-cash perks that employers provide to employees. Instead of giving you additional money, they give you something of value.
Examples of Benefits in Kind include:
Company cars
Private medical insurance
Company-owned housing
Gym memberships
Mobile phones
Interest-free or low-interest loans
How are Benefits in Kind Taxed?
The amount of tax you pay on benefits depends on what kind of benefits you get and their cash value, which is worked out by your employer.
Certain benefits in kind are tax-free, such as a mobile phone, workplace parking, and childcare vouchers. Other benefits are subject to tax, which could be paid in a number of ways:
Payrolled benefits are added to your payslips each month, and the tax is deducted before you receive your wages.
Your tax code may be amended by HMRC to account for the additional untaxed income (if not deducted from your payslips).
If you submit a tax return to HMRC, your benefits will be included in the tax calculation.
You don't pay national insurance on your company benefits, this is done by your employer.
Employers have to fill in yearly P11D forms to report their employees' company benefits to HMRC. They must also report and pay any Class 1A National Insurance due on these benefits. This is paid at 13.8% for the 2024/25 financial year.
Examples:
Company cars
This is one of the most common Benefits in Kind. You have to pay tax if you use your company car for private use, including commuting to work. Company cars are taxed based on their value. The value of the car is then reduced if you have it part-time or if you pay something towards it. This value is then multiplied by a certain percentage depending on its CO2 emissions. As a result, lower-emissions cars tend to incur less tax.
If you are provided with a company car valued at £10K with 80 g/km of CO2 emissions, your car benefit charge would be £2100 (£10K x 21%). You will pay tax on this charge at the applicable rate- this depends on your tax band. If you are in the basic rate band, you will pay 20% tax on this, which equates to £420.
As an employer, you would pay HMRC £289.80 in Class 1A NI for this benefit.
Gym memberships
This benefit is fully taxable, so the employee must pay tax on the value of the membership. If the membership would usually cost £15/month, this is the value the employee would be taxed on. At the basic rate, this would be taxed at £36 per year.
As an employer, you would pay HMRC £24.84 in Class 1A NI for this benefit.
Loans
If your employer provides you with an interest-free or low-interest loan over £10,000, the difference between the interest rate charged and the official interest rate is taxable. This is most commonly caused by directors borrowing money from their limited company.
For 2024/25, the official HMRC interest rate is 2.25%. If you had an outstanding loan of £20K at the end of the tax year, and you haven't been charged any interest by the company, the value of your benefit would be £450. You would then pay tax on this depending on your tax band, at the basic rate you would pay £90.
As an employer, you would pay HMRC £62.10 in Class 1A NI for this benefit.
Are Benefits in Kind worth it?
Benefits in kind are a great way to enhance your overall compensation package. However, they do come with tax implications, so it's important to understand how they fit into your finances.
As an employer, offering a strong benefits package can make your company more attractive to potential new hires, and help to retain valuable employees. Additionally, some of the benefits you provide (such as the cost of gym memberships or medical insurance) are tax deductible, and any Class 1A NI you pay to HMRC is also tax deductible. This means you pay less Corporation Tax when the time comes to submit your return.
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