In addition to paying your employees wages or a salary, there are a number of options available to reward them further. One of the most common and flexible options is to offer benefits-in-kind (BIKs). BIKs take a number of forms, and they can be offered as additions to basic payment or as part of a package tailored to individual employees. Offering BIKs in addition or as an alternative to part of an employee’s salary, may provide tax benefits for both the employee and your business.
What are Benefits in Kind specifically?
The definition provided by HMRC is a broad one. They define BIKs as ‘anything of monetary value you provide to your employees that is not ‘wholly, exclusively and necessary’ for them to perform their contractual duties.
For example, if you give a vehicle to a delivery driver, a field service worker or a sales representative, HMRC would consider the vehicle to be essential to their work. That vehicle would not be considered a BIK, unless the employee made extensive private use of the vehicle. However, if you give a vehicle to an employee who does not need to travel on business, the vehicle would be considered a BIK.
What do HMRC consider tax-free benefits?
HMRC provide an extensive list of tax-free benefits, which you can view in full here. Some of the headline tax-free benefits are as follows:
- Accommodation, supplies and services on your business premises
- Free or subsidised meals
- Meal vouchers
- Cost of nurseries and play schemes
- Childcare vouchers
- Payments towards additional household costs where employees work at home
- Incidental overnight expenses
- Certain retraining costs
- Employer-funded or employer-reimbursed training
- Car, motorcycle and bicycle parking
- Christmas or other annual party
- Sports facilities
- Mobile phones
Although this seems like an opportunity to be generous to your employees, there are many limits and exceptions within each of the options, so it pays to check HMRC’s rules on tax-free BIKs before offering the benefit.
Which BIKs are taxable?
Again, HMRC provide a list of taxable BIKs, but the rules are complex and include various exemptions – so check the rules carefully to ensure you don’t end up paying more tax that necessary:
- Company cars for personal use
- Fuel for a company car for the employee’s personal use
- Private medical insurance
- Interest-free or cheap loans to employees over £10,000
- Clothing that is not essential for the employee’s job role
- School fees for employees’ children
- Accommodation provided rent-free or below market rent that is not essential for the employee’s job role
In the non-taxable benefits section earlier in this article, you saw that providing an employee with a company vehicle that is essential to their job, is not a BIK. However, if you provide an employee with a vehicle that they are allowed to drive for both business and personal use, that is a taxable BIK.
The value of the benefit is based on a number of factors, including:
- The date of registration of the car
- The list price of the car and any accessories
- The vehicle’s carbon dioxide emissions
- The type of fuel the car uses
The taxable value of the vehicle will be reduced if the employee has it part-time, they pay a contribution towards the cost or produces low CO2 emissions. The taxable value for hybrid or electric vehicles is calculated in a slightly different way to the more traditional fuel types. If a vehicle has CO2 emissions of 1 to 50g/km, the taxable value is determined by the distance the vehicle can travel on electric power.
How much tax do you pay on BIKs?
If you provide an employee with a BIK that HMRC considers taxable, the employee will have to pay income tax on the financial value of the benefit – the ‘cash equivalent’ in HMRC terminology. The amount of tax the employee pays will be based on their income tax band – 20%, 40% or 45%.
If you provide BIKs to your employees, you will also need to pay tax in the form of Employer’s National Insurance of 13.8 percent of the taxable value of the benefit. However, the cost of providing BIKs is an allowable expense against the company profits, thus reducing your Corporation Tax bill.
How do I report tax on BIKs?
An employer is responsible for reporting that employees have received BIKs. Form P11D must be completed and submitted to HMRC to do this. The form provides a list of all possible benefits – the employer selects the applicable benefits and the value is recorded also. The deadline for submission is the 6th July following the tax year in which the employee received the benefit.
You should also provide a copy of the form to the employee so they can check the calculation and ensure that they have paid the correct amount of income tax or National Insurance.
The rules relating to BIKs can be extremely complex, and whilst providing a benefit package to an employee might sounds attractive on the surface, it may land them with an unexpected tax bill. With the right plan and one eye on the future, both you and your employees can benefit from BIKs.
Understanding all of the complexities can be stressful and time-consuming. Our team of accountants are experienced in assisting with BIKs and can help to ease the burden of creating an attractive package that can help to motivate and retain your employees, whilst being as tax efficient as possible. Get in touch today!
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