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What are benefits in kind? Introduction & tax guide

What are benefits in kind? Introduction & tax guide

Today companies provide their employees with various types of added benefits. Any benefit that you receive as an employee in addition to your basic salary is the Benefit in Kind from your employer. It can also be regarded as the benefit that you can use both in your personal time as well as the business hours and is referred to as a perk or the ‘fringe benefits’, that may be a vehicle provided by your company for both the office as well as the personal use. Although this all seems a nice added bonus, the noticeable thing is that it all may not necessarily go for free, and HRMC will need you to pay tax.

Moreover, this can be challenging for self-employed or employers to understand the rules about benefit in kind tax. Benefits are usually tax-free, while such are taxable, making it complicated to assess which rules apply to your situation according to your benefits. We are providing a quick guide here to make such things easier to understand.

What does benefit in kind mean?

These are the benefits that a company provides to their director or employee besides their wages or salary.

A company car, any residence accommodation by company, private medical insurance, or non-business travel are all examples of benefit in kind (BIK). Such benefits in kind that have a monetary value involved may be subjected to taxes, and you will be demanded to report HMRC as well.

Tax-free or non-taxable benefits in kind?

These are the most common benefits in kind you receive from the company or employer. In such cases, both the employee and employer are not demanded to pay the tax. Here are a few examples of non-taxable benefits in kind:

  • Subsidies meals provided to the employees at the canteen
  • Various entertainment facilities
  • Pension payments
  • Various other sports and safety facilities are available at the workplace
  • Expenses for transportation, e.g. public bus services

 Taxable benefits in kind

  • Vehicles provided by the company that is also allowed for personal use
  • Fuel for personal use
  • Accommodation having no rent or less rent than the market value
  • Fees of the children of employees
  • Private medical insurance
  • Loans from the company that is interest-free or discounted
  • Expenses for non-business travel

How to figure out what tax is to pay on a benefit in kind?

The rules to determine what tax needs to be paid or not are diversified to understand. It all depends on what benefits are being received or offered. When you are receiving a benefit in kind as an employee, you have to pay income tax for it.

To calculate how much you will pay, apply the income tax rate band according to your income tax to the taxable value of the benefit you are being offered. The band defines that you have to pay 20% if it stands under the basic rate; for the higher rate, it is 40%, and for the additional rate, it is 45%. A rule also says the employer providing the benefit in kind to his employee will also have to pay tax in the form of the employer’s NI at a rate of 13.8 per cent of the benefit’s taxable value.

Reporting and paying tax on benefits in kind

At the end of each year, all the employers are asked to report their employees’ benefits. They are responsible for this reporting.

Ways to report and pay tax:

There are two ways to report and tax the benefits

  1. P11D form submission

This is a tax form that keeps all the records of the employment benefits that the directors, as well as other employees, receive from the company over the year. The employer is responsible for submitting a P11D form for each employee receiving the benefits or expenses. Self-employed are considered both the employee and employer, which means they also need to fill out the P11D form. The form provides a list of all possible benefits which the employer simply selects the relevant ones and states the value of the benefit that was provided to the employee.

The P11D(b) form is also required to submit by you in the following conditions:

  • If you have submitted any P11D forms
  • The benefits or expenses of the employee have been paid through your payroll
  • HMRC has reminded you to report

The P11D(b) form must be submitted alongside the P11D and this allows for employers to pay their NI on the BIKs.

2.Paying tax through payroll

The tax on benefits provided to the employees can also be deducted and paid through the payroll.

For this, you need to get yourself registered with HMRC before the tax year starts (6th April). And an important thing to note down here is you do not need to submit the P11D form in this case, but the P11D(b) will still be required to be submitted.

For employees, income tax is charged on the BIK. The payment for this will be automatically deducted via your payroll and so there is nothing you need to do.

This guide helps make things a little easier to understand what the benefits in kind are, what benefits are taxable and what are not, what are the tax calculations, and how to report and pay off taxes as well. It also explains the complications of the procedure to assess the tax rules and accurately understand the benefits in kind tax calculations.

This demanding and hectic procedure needs time and expertise. Also, analysing the case of each employee who is being provided with benefits in kind may be confusing. Furthermore, reporting the taxes, filling out the P11D and P11D(b) forms, and paying off the taxes is a complex task to do by the employers and self-employed persons. Here you need experts who can perform all these tasks efficiently and precisely. Our company ‘Bloom Financials’ also provides its expertise in taxation regarding the benefit in kind. Employers, self-employed persons, and even employees can get help to make this procedure easier and swift.

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