Benefits in Kind Provided to Employees

Introduction If an employer wishes to provide an enhanced pay-and-reward package to employees or directors, there is a range of benefits that can be offered in addition to a basic salary. These are known as 'benefits in kind'. An enhanced package can help to attract and retain key employees, but there are tax implications for both the employer and the employee if benefits in kind are offered. It is important to be aware of the tax implications, to set up procedures to identify and record all benefits in kind that the employer provides to staff, and to ensure that any relevant tax is paid.

Here we explain the various types of benefits in kind that can be provided to employees and outline which ones are taxable and which ones are exempt from tax. It explains the requirements of the tax system and the reporting procedures that must be followed to ensure that employers comply with their obligations.

Employers should consult a professional adviser before making any decisions about the provision of benefits in kind.

What is a benefit in kind? If an employee receives benefits from their employment other than salary or wages, they are in receipt of a 'benefit in kind'. Benefits in kind can include company cars, health insurance, childcare and cheap or interest-free loans.

An employee may have a contractual right to receive a benefit as a part of their employment contract, for example free accommodation provided to a school caretaker. Any benefit packages that are provided to married spouses must also be provided to civil partners under the Civil Partnership Act 2004. However, not all benefits in kind are received as a result of a contractual requirement. For example, a benefit in kind could arise from the private use of a business asset, such as an employee using a van at weekends or the purchase by an employee of a business asset at less than its market value.

Some expense payments to employees may also qualify as a benefit in kind if the cost is not incurred wholly, exclusively and necessarily in the performance of the duties of their employment. For example, if an employer reimburses an employee's home telephone bill, the costs of line rental and private calls will fall outside the definition of 'incurred wholly, exclusively and necessarily in the performance of the duties of employment', and would therefore be treated as a taxable benefit in kind. However, the payment for the cost of business calls would qualify as tax free.

Tax implications of benefits in kind If an employee or director receives benefits in kind from their employment, they may be liable to pay tax and National Insurance contributions (NICs) on the cash value of that benefit. In general, employees and directors must pay tax on the benefits they receive, which must be deducted from their salary by their employer as if they were normal earnings.

In particular, an employee may be liable for tax on a benefit in kind if:

An employer provides something to an employee and does not recover the full cost from them.
An asset of the business is not used wholly for business purposes and the employee does not refund the cost of private use.

All employers are obliged to notify HM Revenue & Customs (HMRC) of any benefits that are provided to employees and will also have to pay employers' NICs on the value of the taxable benefits provided.

However, the calculation of tax due is not straightforward because:

Not all benefits are taxable.
Where a benefit is taxable, the taxable value of that benefit needs to be calculated so that the correct amount of tax can be paid.
Some benefits are subject to special rules and may be liable to different taxes. For example, some may incur an income tax liability, some may only be liable to NICs and some may be liable to both.

It is important for employers to discuss any plans for providing employee benefits packages with an accountant or with HMRC, to ensure that they are fully aware of the tax implications before benefits packages are put in place.

Taxable benefits in kind Some common benefits in kind made available to employees that are taxable are as follows:

Company cars. This is probably still the most common benefit provided to employees, with the taxable benefit being determined by a combination of the car's CO2 emissions, the value of the car and how much use of the car the employee will have. Many employers believe that the benefit is calculated based on the market value (or price paid) for the vehicle, but it is actually based on the manufacturer's list price of the vehicle when new. As an example, if an employer buys a second-hand car for the use of an employee, it is the list price when new that is used to calculate the benefit. A separate tax charge applies if fuel for private use of the vehicle is paid for by the employer, unless the employee reimburses the employer for all private mileage. Private use includes travelling between an individual's home and main place of work.
Vans. A standard taxable benefit applies if a van is made available to an employee for private use, unless the use is 'insignificant' (eg, minor detours for private purposes). In addition, a further charge applies for private fuel that is paid for by the employer.
Medical insurance. The full cost of providing private medical insurance for employees is taxable as a benefit, except where it relates to injuries or diseases that result from employees' work.
Use of a business asset. The annual benefit amounts to 20% of the asset's market value when first made available to the employee.
Cheap or interest-free loans. This relates to loans of more than £10,000 and the benefit is calculated on the difference between the interest charged and the expected 'official rate' of interest for the tax year concerned.

Tax-free benefits in kind Not all of the benefits given to employees are subject to tax. Benefits that are not taxable may be attractive to employees who are higher-rate taxpayers.

The following list details some of the tax-free benefits that can be offered to employees:

Pension contributions. Although employers have a legal obligation to enrol employees automatically in a qualifying workplace pension scheme, it is important to remember that contributions are tax free to the employee when made to an approved pension scheme and employer contributions are a tax-allowable expense for the business.
Mobile phone/smartphone. The cost of providing a single mobile phone/smartphone or SIM card for an employee is tax free if the phone contract is between the employer and the supplier. However, if an employee uses their own phone and their employer reimburses the cost, PAYE tax and NICs may be payable in relation to the monthly phone tariff and any private calls, although the cost of business calls is tax free.
Childcare vouchers. Employers can arrange the payment of childcare vouchers (often under a salary sacrifice scheme) so that the employee pays no tax or NICs. The employer's NIC contributions are also waived. From October 2018, childcare voucher schemes have been closed to new applicants. However, employers can continue to offer this as a tax-free benefit to employees who joined their scheme before this date, provided that the employees are not also using the government's Tax-Free Childcare scheme.
Workplace nursery places. Nursery places made available and financed by the employer are also tax free.
Annual staff functions. Employers can pay up to a total of £150 per head per year for staff Christmas parties or similar annual events without incurring tax.
Free parking. When free parking is provided at or near an employee's place of work or for use while on a business journey, they pay no additional tax on the benefit.
Meals provided at work. Free or subsidised meals at work incur no additional tax as long as they are available for all staff.
Relocation costs. The costs of relocating a member of staff up to the value of £8,000 can be provided by the employer tax free. If costs are incurred above £8,000, the benefit will become taxable.
Awards. Long-service and suggestion scheme awards (rewards to employees for suggestions that benefit the business, such as money-saving ideas) can be provided tax free up to HMRC-specified limits.

A full list of the qualifying criteria for these and other benefits is included in HMRC's booklet 'Expenses and Benefits for Directors and Employees - A Tax Guide'. Employers should also seek advice from an accountant or other professional adviser.

Record keeping Employers must keep comprehensive records to track which benefits in kind are provided to each employee. Employers need to be able to identify which benefits have been made available to an employee and what the taxable value is.

The quality and accuracy of the records kept will help employers to:

Complete the annual return quickly and accurately.
Respond to any HMRC enquiries that may arise from the return.
Maintain relevant supporting information, which will become very important if HMRC makes a tax investigation compliance visit to the employer.

Reporting benefits in kind to HMRC At the end of each tax year (5 April), employers are required to report to HMRC details of expenses payments and benefits provided to each of their employees. Form P11D must be completed for each employee who earns more than the personal income tax allowance and for every director who has received benefits. Any taxable benefits for lower-paid employees are recorded on Form P9D. These forms must be submitted to HMRC and to relevant employees by 6 July each year.

Employers must provide each employee with a statement of the information shown on their P11D or P9D, which in practice means providing them with a copy of the form. They will need this information if they are required to complete a self-assessment tax return.

Employers are also required to complete an annual return covering all expenses and benefits and the corresponding Class 1A NICs due as a result, Form P11D(b). The return is due to be submitted to HMRC by 6 July each year and payment for the Class 1A NICs is due by 22 July (or 19 July for payments made by cheque).

For most benefits in kind, employers also have the option to deduct any tax that becomes due on the benefits through their payroll software. Any employer who chooses to do this will not be required to complete a form P11D. This system will eventually remove the need for the reporting forms and calculations will be made automatically.

Exemptions and PAYE settlement agreements In April 2016, an exemption was introduced which meant that employers were no longer required to agree a dispensation with HMRC for reporting non-taxable benefits and expenses. This exemption applies to benefits in kind that are eligible for tax relief and all 'trivial' benefits, such as Christmas presents and gifts worth less than £50. Employers are still required to keep records of the benefits that have been paid or reimbursed to employees to ensure that the correct amount of tax and tax relief is being applied.

The exemption also applies to all employers who use approved HMRC scale rates for certain expenses or benefits in kind such as business travel expenses, reimbursed or paid as a set amount of cash to employees.

A PAYE Settlement Agreement (PSA) is a flexible way of managing some expense and benefit payments that result in a taxable charge, such as incidental travel costs. It is a voluntary agreement that enables employers to make one annual payment for tax and NICs due on small and irregular taxable benefits or expenses for employees.

A PSA means that employers do not have to:

Report the agreed items on a P11D or P9D form.
Operate PAYE on these items.
Assess Class 1 or Class 1A NIC liabilities for these items.

However, both the tax and NICs due must be reported and then payment must be made by 22 October (or 19 October for payments made by cheque).

Before 2018 PSAs were annual agreements that had to be renewed each year. However, with effect from April 2018, the requirement for annual renewal was withdrawn by HMRC.

Salary sacrifice and benefits in kind Some employers offer benefits in kind to their employees under a salary sacrifice scheme, which is an agreement between the employer and the employee to reduce the employee's entitlement to cash payment in return for providing them with a benefit in kind.

Exemptions on benefits in kind do not apply to salary sacrifice schemes. However, the following benefits often provided under a salary sacrifice scheme do not have to be reported to HMRC:

Payments into pension schemes.
Employer-provided pensions advice.
Childcare vouchers, workplace nurseries and childcare that has been directly contracted by the employer.
Bicycles and cycling safety equipment.

Costing an employee benefits package When providing a benefit to an employee, employers need to consider:

The direct cost to the business of providing the benefit.
The cost of employers' Class 1A NICs.
The additional tax cost for the employee.

It is important that employers are confident that their employees will perceive significant value from any benefits that are provided by the organisation. It may give better value to both parties for employers to pay employees higher salaries, rather than providing benefits. For example, instead of providing a company car, an employer could pay a car allowance as part of the employee's salary. This would enable the employee to claim approved tax-free mileage costs from their employer for making business trips using their own car.

Hints and tips

The tax legislation surrounding the provision of benefits in kind changes frequently, typically as part of the Chancellor's Budgets. It is therefore important for employers to carry out regular reviews to ensure that they are complying with current legislation.
Benefits in kind can be attractive inducements, often used for recruiting and retaining staff, but they also impose administrative and reporting responsibilities. Employers could consider offering exemption-only benefits to reduce the administration of regular and non-taxable expenses and benefits in kind.
Employers should consider setting up a PSA with HMRC if they want to provide staff with fairly small and irregular benefits, such as a Christmas hamper. This will avoid any tax becoming due as a result of a small benefit being provided to an employee.

Contact Ashored for more information and support on Benefits in Kind.