If you’re a small business owner in the UK, you’ve probably heard the term “Benefits in Kind (BIK)” thrown around. But what exactly does it mean, and how does it affect your business?
Benefits in Kind refer to perks or non-cash benefits that employees receive from their employer in addition to their regular salary.
These benefits can range from company cars to gym memberships, and while they sound great, they do have tax implications you need to be aware of.
What Are Benefits in Kind?
Benefits in Kind (BIK), also known as “fringe benefits” or “perks,” are non-cash benefits that employees receive as part of their compensation package. Instead of receiving money, employees might get other forms of value, like a company car, private health insurance, or even interest-free loans.
Sounds like a sweet deal, right? Well, it is—until you consider the taxman.
The UK government views most Benefits in Kind as part of an employee’s overall earnings, meaning they’re taxable. That’s right—while your company car or free gym membership might feel like a bonus, it’s also something that HMRC wants a piece of. But don’t worry, not all benefits are taxed, and some can even come with exemptions.
Examples of Common Benefits in Kind:
- Company cars and fuel cards
- Private medical insurance
- Living accommodation provided by the employer
- Gym Membership
- Interest-free or low-interest loans
- Childcare vouchers
- Use of company assets (e.g., laptops or phones used for personal reasons)
- Tax Implications of Benefits in Kind
Here’s the catch: most Benefits in Kind are taxable. Employers are required to report these perks to HMRC, and employees might need to pay additional tax based on the value of the benefit they receive.
HMRC assigns a value to each Benefit in Kind, usually based on the market value or cost to the employer. Employees are then taxed on this value as if it were an additional salary. In some cases, the benefit could push the employee into a higher tax bracket, increasing their overall tax liability.
For employers, offering Benefits in Kind means additional reporting obligations. Every year, you’ll need to submit a P11D form to HMRC, outlining the value of any benefits provided to your employees. And, let’s not forget, you may also need to pay Class 1A National Insurance contributions on the value of these benefits.
A Quick Breakdown of Taxes:
- For the employer: You’ll need to pay Class 1A National Insurance contributions on the value of Benefits in Kind provided.
- For the employee: The value of the benefit is added to their salary.
- Which Benefits in Kind Are Tax-Free?
Not all Benefits in Kind are taxable—there are some that HMRC allows to be offered tax-free. These can be excellent perks for employees, while still saving the business money in taxes. Some of the most popular tax-free Benefits in Kind include:
- Work-related training: Training that’s necessary for your job is exempt from tax.
- Mobile phones: If the phone is given for work purposes, this is tax-free.
- meals in a staff canteen: Lunch provided to staff in a workplace canteen are tax-free
- Employee assistance programmes (EAPs): Confidential counselling services offered to employees are tax-free.
- Trivial Benefits: Any benefit given to the employee (or Director) that cost less than £50, i.e. flowers or chocolates provided that the benefit is not in the form of cash or a cash voucher or related to workplace performance.
Offering tax-free benefits can help small businesses attract top talent without increasing the overall tax burden for employees. It’s a win-win, especially when budgets are tight.
- How to Calculate the Value of Benefits in Kind
Now, how do you figure out the value of a Benefit in Kind? Well, HMRC provides clear guidance on how to calculate this based on the type of benefit. The valuation can depend on various factors, such as whether the benefit is used personally or for work purposes.
For example, if you provide an employee with a company car, the value of the benefit depends on the car’s list price and its CO2 emissions. More environmentally friendly cars tend to have lower BIK rates. On the other hand, providing an interest-free loan to an employee will require you to calculate the benefit based on the interest they would have paid had they taken out a loan at market rates.
It’s essential to get these calculations right. Incorrect reporting could lead to fines or penalties from HMRC, and trust me, that’s not something you want to deal with.
Simplified Example: Company Car BIK Calculation
- List price of the car: £26,875
- CO2 emissions: 127g/km
- BIK rate: 30%
- Taxable value: £26,875 x 30% = £8,063
- This £8,063 is added to the employee’s salary for tax purposes.
- Depending on the employee’s tax bracket, 20% tax would total £1,613
- How Small Businesses Can Make the Most of Benefits in Kind
As a small business owner, offering Benefits in Kind can make your company more attractive to potential employees, especially if you can’t compete with larger companies on salary. However, it’s crucial to balance the benefits you offer with the associated costs, including tax liabilities and administrative burdens.
Here are some tips on offering BIK efficiently:
- Use tax-efficient benefits: Offer perks that come with little or no tax implications, such as mobile phones or job-related training.
- Review your P11D forms carefully: Make sure you’re accurately reporting the value of all Benefits in Kind to avoid penalties from HMRC.
- Communicate with your employees: Make sure they understand the tax implications of the benefits they’re receiving, so there are no surprises when their tax bill arrives.
- Get expert advice: Tax rules around BIK can be complex, and they frequently change. Working with an accountant can help you stay compliant while making the most of the benefits you offer.
Does this also apply to director-only payroll?
Yes, Benefits in Kind (BIK) rules also apply to director-only payrolls. If you’re a director and want to receive perks like private healthcare, a company car, or other non-cash benefits, these would still be considered Benefits in Kind by HMRC and must be reported accordingly.
Even if you’re the sole director with no employees, the same tax implications and reporting requirements apply. Here’s how it works in a director-only payroll scenario:
- Private Healthcare and Other Perks as Benefits in Kind
If you, as a director, receive private healthcare or other non-cash perks, HMRC treats these as taxable benefits. The value of the benefit is added to your overall income and taxed accordingly.
For instance:
- If your limited company provides you with private healthcare, the value of this benefit is reported on a P11D form, and it becomes part of your taxable income.
- You’ll pay tax on the value of the benefit, while the company will also have to pay Class 1A National Insurance Contributions on the value of the benefit.
- Reporting and Compliance
You’ll need to report the benefits on your company’s annual P11D form and pay any relevant tax and National Insurance contributions. This applies regardless of whether the company has other employees or just you as the director.
- Tax Considerations
Directors, like employees, can receive some tax-free or low-taxed benefits. However, most benefits (like private healthcare) are taxable. As a director, you might also want to explore more tax-efficient benefits like contributions to a pension scheme, which can have more favourable tax treatment.
Summary for Directors
Even if you’re running a small limited company with only yourself on the payroll, any Benefits in Kind you receive, such as private healthcare, are subject to the same tax rules and reporting requirements as they would be for regular employees. You’ll need to ensure that the correct tax is paid and the benefit is reported accurately to HMRC.
If you’re unsure about how to handle Benefits in Kind for yourself as a director, it’s always a good idea to get expert advice to ensure you’re compliant with tax laws while making the most of available perks.
Schedule a Call with Us Today!
At Keirstone, we understand the intricacies of offering Benefits in Kind and can help you navigate the tax implications for your business. Whether you’re just starting to offer perks or need help managing your P11D forms, we’re here to provide tailored advice.
Want to learn more? Schedule a call with us today and find out how we can help you make the most of Benefits in Kind while staying compliant with HMRC.
Let us help you ease the pressure from managing your taxes.
Add a Comment
You must be logged in to post a comment