The Complete Guide to Benefits in Kind for Employers

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PayFit

Last updated on 17.03.2022

A benefit-in-kind (BIK) is a type of benefit you can offer an employee (or director of a company) on top of their salary.

They are sometimes referred to as fringe benefits or “perks” and include some of the most common ‘goodies’ candidates look for as part of their compensation package.

BIK tax is a complex topic, and there are several obligations you need to meet as an employer when it comes to offering BIKs to employees.

In this guide, we explain what are benefits in kind, and why it's a great idea to offer them. We'll also touch on how to report and tax BIKs and what you can do to simplify this process.

What is a benefit-in-kind?

It's a non-cash offering made to an employee that you need to cover as the employer. While non-cash, these benefits still hold monetary value, which you'll need to report as taxable income. 

Most of us will be familiar with BIKs like medical insurance, gym memberships and company cars that are often included in an employee’s compensation package.  

Benefit-in-kind examples

Some of the most common benefits-in-kind are:

  • Private health insurance

  • Home phones (including for personal use)

  • Company cars

  • Non-business travel & entertainment expenses

  • Assets for personal use (such as computers, bikes and televisions)

It’s important to note that most of these benefits will incur tax. 

What is the purpose of offering benefits-in-kind?

Put simply, it’s to provide something beneficial to your employee beyond just money. 

There are many reasons your company might decide to offer BIKs, including: 

  • to support employees with their commute (think a company car or the Cycle to Work Scheme)

  • to attract new talent to the business

  • to support employee health and financial wellbeing

But it’s much more than just this. Most BIKs are designed to benefit employees on a personal level. So in that sense, they can be pretty influential. While they aren’t ‘wholly and exclusively necessary” to the running of your business or company, BIKs can add to an employee’s overall sense of fulfilment, which in turn can promote better job satisfaction.

Why offering benefits is important

There was a time when fringe benefits used to be just that - fringe. But in the last few years, especially since the global pandemic, the role benefits play is more enhanced. In today's world of work, employee benefits show you're investing in talent, not only in their health and overall wellbeing but also their future growth and personal development.

Offering a competitive employee benefits package can do a lot - from attracting top talent to helping your business stand out from competitors. 

Employers - what are your obligations?

As an employer, there are several obligations you need to meet when it comes to providing these types of benefits:

  • You’ll need to inform each employee of the benefits they’ll receive as part of their compensation package. You’ll also need to let them know how this will impact their tax and NIC payments. One of the easiest ways to communicate these details is by including them in their employment contract.

  • You should report any benefit-in-kind your organisation offers to HMRC before the 6th of July via a P11D or through the payrolling benefits service.

  • Of course, it’s always worth reminding employees of what benefits they have and ensuring they have easy access to these (like health insurance)

  • All employers need to pay Class 1A NIC to HMRC related to benefits before the 2nd of July deadline

Taxation of benefits-in-kind

When it comes to benefit in kind tax, the UK tax system doesn’t have a “one size fits all” approach. 

While some benefits-in-kind are taxed, others aren’t. On top of this, each type of benefit comes with its own set of specific rules. As such, HMRC also needs to consider how a benefit is being used before deciding how to treat it.  

All of this can make it very difficult to determine what to do (unless you’ve got an HMRC-approved software that’s backed by real payroll expertise).  

In addition to this, NIC will always be deducted through payroll, even if you don't payroll benefits. You may also need to deduct tax whether you payroll your benefits or not.

HMRC’s A to Z of expenses and benefits provides a comprehensive guide on the taxation of benefits.

The following are examples of circumstances that may not require taxation:

  • Some types of commuting costs ( such as a work bus service)

  • Work and safety clothes, such as overalls and hard helmets

  • Meals served to employees in a staff canteen (if the value of the meal is ‘reasonable’)

  • Employee mobile phone costs (between your company and their service provider)

  • Business expenses paid for on a company credit card by an employee. As long as your employee isn't making a personal purchase, or where specific tax rules apply (e.g. fuel for a company car, parking spaces or incidental overnight expenses)

  • Business expenses paid for on a company credit card by an employee. As long as your employee isn’t making a personal purchase, or where specific tax rules apply (eg fuel for a company car, parking spaces or incidental overnight expenses)

  • Training or development costs (as long as they are work-related).

Reporting benefits in kind - submitting P11Ds and a P11D(b)

Submit P11Ds form for each employee

Unless you opt for one of the alternative options in the next section, you'll need to fill out a P11D form to report benefits-in-kind.

As an employer, you should complete this form for each employee that has received a BIK. Only BIKs that are taxable should be reported on a P11D. 

A benefit-in-kind technically increases an employee’s salary, which means there will usually be NICs to be paid on these. Employers are responsible for making these rather than the individual employee.  

All P11Ds must be submitted after the end of the tax year by the 6th of July. Employees should also receive a copy of their P11D for record-keeping purposes.

File a P11D(b)

Your company also need to file a P11D(b) form. This form effectively summarises all the individual P11D records you've completed for employees. On it, you’ll need to include the total for National Insurance payable on all expenses and benefits provided, otherwise known as your Class 1A NIC payment.

Your company’s P11D(b) is due along with all other P11Ds required on the 6th of July. The Class 1A NIC payment is due shortly after this on the 22nd of July.

It’s essential to keep all receipts and expense forms on file concerning these benefits.

Benefit-in-kind alternatives - payrolling benefits and PAYE Settlement Agreements 

Payrolling benefits

If filling out and sending individual P11Ds each year doesn’t sound like your cup of tea, there is an alternative that can save you some time.

Payrolling Benefits in Kind was a service introduced by HMRC in 2016 as an alternative to the original P11D system. Sign up your company for this service, and your employees can pay the tax required on these benefits on your behalf. A small amount is deducted from their salary to go towards this tax each month. 

In other words, tax is deducted via payroll rather than via a P11D form. 

Your P11D(b) is still due on the 6th of July, along with your NIC payment on the 22nd of July. 

You’ll also need to let your employees know by the 1st June what benefits you have or haven’t payrolled. 

PAYE Settlement Agreements

If the benefits you’ve provided only include minor or irregular expenses, it makes sense to opt for a PAYE Settlement Agreement instead.

This alternative process allows you to make one annual payment to cover all tax and NIC payments in one go.

If you’ve only got things like gift vouchers, entertainment costs or irregular and impractical expenses to declare as benefits, this is the ideal option for reporting.   

All your Benefits-In-Kind sorted

Whether you file P11Ds or payroll your benefits, our platform processes benefits with ease.

Adding benefits such as PMI, gym memberships and company cars is a breeze. Where a benefit-in-kind arises, our platform automatically populates all P11Ds required, along with your P11D(b), before sending these off to HMRC. 

All Class 1A NIC payments are calculated for you. Employers also have the option of payrolling benefits if they are registered for this service.

To sum it up, we automate over 80% of all manual tasks associated with your payroll process while ensuring you adhere to HMRC’s rules and regulations. No more sleepless nights fretting over compliance.

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