It is becoming increasingly competitive to recruit employees, and a growing expectation by potential employees for benefits in kind to be provided. HMRC say that anything of monetary value you provide to an employee that is not “wholly, necessarily and exclusively” for them to perform their role is a benefit-in-kind. We take a look at what this means for you and the employee, and what you can provide to them tax free!
The treatment of Benefits in Kind
If you provide a taxable benefit-in-kind to an employee they will need to pay income tax on the cash equivalent value of the benefit. Examples of taxable benefits-in-kind include the following:
- Private medical insurance
- Gym subscriptions
- Company cars for personal use
The amount of tax that the employee will pay on the benefit(s) will depend on their income tax band. If they are a basic rate taxpayer (including the value of the benefits) they will pay tax at 20%, if they are a higher rate taxpayer it will be 40%, and if they are an additional rate taxpayer it will be at 45%.
Reporting of Benefits in Kind
The employer will have to report the value of taxable benefits an employee received after the end of every tax year via a form called a P11D. This form has to be submitted to HMRC by 6th July following the end of the tax year, and a copy provided to the employee.
Taxation of benefits provided to employees
The impact will be that when HMRC process the P11D for an employee they will change the employees’ tax code. The standard personal allowance in the UK for 2023/24 is £12,570, so if for example an employee receives taxable benefits totalling £2,000 then HMRC will change their tax code from 1257L (being the £12,570) to 1057L (reducing their allowance to £10,570). This then allows for collection of the relevant tax at the right rate.
Veritons are accountants and tax advisors based in Medway, Kent, and we specialise in advising small businesses and their owners. If you would like to explore benefits-in-kind further and the impact they could have on your workforce, book you free initial consultation here.
Additional cost of Benefits in Kind for employers
Alongside the P11D’s the employer will submit a form called a P11Db. This summarises the total of taxable benefits provided to employees and shows how much Class 1a National Insurance is due. Class 1a National Insurance is charged at the same rate as Employers National Insurance (currently 13.8%), so from an employers’ perspective it is the same cost as providing the employee with a salary increase of the same value.
Top tip
Historically company cars with private use have meant a high tax charge on the employee and a lot of class 1A NIC for the employer. However electric cars are at a much reduced rate until at least 2025. See our previous blog post here.
Benefits which are not taxable
There are a number of benefits that can be provided to an employee which do not constitute a taxable benefit in kind. This means they are not subject to reporting and do not affect the employees tax code. These include:
- Providing an interest free loan up to the value of £10,000
- A mobile phone
- Social functions and parties up to £150 per annum (including VAT)
- Payments for an employee using their personal car for business purposes up to the HMRC approved mileage rates (currently 45p per mile for the first 10,000 miles, 25p per mile thereafter)
- Trivial benefits – see below
What is a trivial benefit?
HMRC allow you to pay trivial benefits, tax free, to employees in the course of a year. What makes a benefit trivial is meeting the following criteria:
- It cost you £50 or less to provide
- It isn’t cash or a cash voucher
- It isn’t a reward for their work or performance
- It isn’t in the terms of their contract
An employer can provide multiple trivial benefits in a year, however where the company is a close company (under the control of 5 or fewer shareholders) the limit is £300 for directors or other office holders, or a member of their family or household.
If you would like to discuss benefits in kind further, please reach out on our contact page.