As the competition for talent in the job market intensifies, there’s a growing expectation among potential employees for companies to offer benefits in kind. Here we have explored what this means for both employers and employees and identify what can be provided tax-free.
According to HMRC, a benefit in kind refers to anything of monetary value given to an employee that is not considered to be “wholly, necessarily, and exclusively” for their job. If an employer provides a taxable benefit in kind, the employee is required to pay income tax on the cash equivalent value of that benefit. Examples of such taxable benefits include:
- Private medical insurance
- Gym subscriptions
- Company cars used for personal purposes
The tax rate at which the employee is taxed for these benefits depends on their income tax band. Basic rate taxpayers, including the value of the benefits, face a 20% tax rate. Higher rate taxpayers are taxed at 40%, and additional rate taxpayers at 45%.
Reporting of Benefits in Kind is essential, and employers must report the value of taxable benefits that an employee receives after each tax year through form P11D or via a payroll adjustment. If this is done via form P11D, the form should be submitted to HMRC by 6 July, following the end of the tax year and a copy provided to the employee. If this is done via a payroll adjustment, there is no form issued or submitted by 6 July as it is effectively dealt with in real time.
The taxation of these benefits will result in HMRC adjusting the employee’s tax code. The standard personal allowance for the UK in 2023/24 is £12,570. So, if an employee, for example, receives taxable benefits totalling £2,000, HMRC will change their tax code from 1257L (the standard £12,570) to 1057L (reducing their allowance to £10,570), allowing for the collection of the relevant tax at the appropriate rate.
Additionally, employers must submit a form called a P11Db, which summarises the total taxable benefits provided to employees and indicates the amount of Class 1a National Insurance due. Class 1a National Insurance is charged at the same rate as Employers’ National Insurance (currently 13.8%). Therefore, from an employer’s perspective, this cost is equivalent to providing the employee with a salary increase of the same value.
A top tip! Electric cars generally have a significantly reduced tax rate until at least 2025, making them a more tax-efficient option.
There are also certain benefits that can be provided to employees which are not taxable. This means that they don’t need to be reported and won’t affect the employee’s tax code. These include:
- Providing an interest-free loan up to the value of £10,000
- A mobile phone
- Hosting social functions and parties up to £150 per annum (including VAT)
- Payments to employees who use their personal car for business purposes at HMRC-approved mileage rates (currently 45p per mile for the first 10,000 miles and 25p per mile thereafter)
- Trivial benefits – see below for more details
Trivial benefits – these are small benefits that can be given to employees tax-free during the year, provided they meet the following criteria:
- They cost you £50 or less to provide
- They are not in the form of cash or cash vouchers
- They are not rewards for work or performance
- They are not part of the employee’s contract
It’s worth noting that for close companies (those controlled by five or fewer shareholders), the limit for directors or other office holders, as well as their family or household members, is £300.
If you would like to discuss anything within this article, please contact a member of the CB Reid team.