Many employees and limited company directors receive “perks” from their employers as a result of doing their job and on the face of it this seems like a great way to reduce personal spending and pay less tax. After all if your employer provides you with a company car to use outside of work then you won’t need to buy or lease one yourself. Now although this may be true there is usually little tax benefit to this type of arrangement as HMRC may identify these “perks” as a benefit in kind and tax them as if they were earnings.
In this article we will look at how to identify a benefit in kind as well the reporting and tax requirements that come with them.
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What Exactly Is A Benefit In Kind?
A benefit in kind is usually incurred where an employee or limited company director receives something from their employer which isn’t wholly necessary to undertake their duties. This could simply be in the form of the employer paying for certain goods or services that the employee would normally pay out of their after tax income. Examples of this include when an employer pays for the employees health insurance, gym memberships, accommodation etc. A benefit in kind can also be incurred when the employee has access to certain goods or services which can be utilised for personal use. Where goods or services can be utilised for personal use the benefit is given a monetary value so that tax can be applied where necessary. The most common example of this is the company car. Although the car may be necessary for the employee to do their job, if the employee also has significant use of the car for personal journeys then a benefit in kind will arise.
Here’s where it gets tricky. There are some benefits that don’t need to be reported to HMRC and won’t be subject to tax and national insurance and others that will. It is always a good idea to speak to a professional if you have any doubts but we will look at some common examples below.
Benefit In Kind - Examples
Once you’ve identified where a benefit in kind exists you will then need to determine whether that benefit needs to be declared to HMRC and if tax and national insurance will need to be paid on it’s taxable value. Some of the most common examples of benefits that may be taxable are:
- Company car
- Health insurance
- Substantial personal use of company assets
- Employee/director loans
- Non business travel/entertainment expenses
- Self assessment fees (usually applicable to ltd company directors)
There are also a number of benefits that may not need to be reported to HMRC and may not be subject to tax and national insurance however the specific requirements for each benefit to be considered exempt can vary so it’s best to refer to HMRC’s detailed guidance to check the specifics of each benefit. The most common examples are:
- Insignificant personal use of company assets
- Staff training
- Mobile phone
- Parking spaces
- Qualifying relocation costs
Having private use of a company car is one of the most common examples of a benefit in kind in the workplace but since it isn’t easy to determine a taxable value HMRC have created a specific set of rules for company car use.
HMRC will want an employee to pay tax if the employee or their family have use of a company car for private purposes. This would usually include commuting from home to a permanent workplace since in the eyes of HMRC commuting is not considered business mileage. For more information on business mileage check out our article make a successful claim for business mileage – How it works.
The taxable value of the car will depend on how much the car costs to buy and the type of fuel it uses. Cars with low CO2 emissions have a lower taxable value resulting in less tax being paid. An adjustment is also made when an employee only has access to the car part time.
If the employer also pays for the fuel the employee uses during private use then there will also be a fuel benefit charge to calculate.
Luckily HMRC provide a handy company car and car fuel benefit calculator to help determine the taxable value of both.
Unfortunately if you do identify a taxable benefit in kind then there will be tax implications for both the employee and the employer to consider.
The employee will pay income tax on the taxable value of the benefit in kind. This is collected via the PAYE system as the employer will need to include the amount in the employees earnings. For future tax years where the employee is likely to receive the same benefits HMRC can change the employees tax code which will spread the cost across the full year.
The employer will also need to pay class 1a national insurance on the taxable value of the benefit in kind at a rate of 13.8%.
Reporting A Benefit In Kind
Employers are required to report a benefit in kind to HMRC via form P11D which must be filed by 6th July following the end of the tax year the benefit was provided in. A P11D is submitted for each employee who received a taxable benefit in kind. The employer will also need to submit form P11D(b) which summarises all the benefit values of each P11D being submitted as well as informing HMRC of the total national insurance liability payable by the business.
For more details on form P11D check out our article what is form P11D? Simple guide to benefits in kind.