benefits in kind

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Introduction 

What are benefits in kind (HMRC) or in-kind benefits for UK contracting professionals, and how does Benefit in Kind work? In this guide, we’ll research what is benefit in kind and the benefit in kind definition and see how this works in practice. In the UK, an employer may provide a company benefit to an employee as part of their employment. Such benefits include several areas where the employee receives some form of benefit from their employer. Consequently, the employment benefits are subject to BiK tax under the UK tax system. Therefore, what is BIK tax, and how does BiK work for limited company contractors? Further, how do we calculate the tax on company benefits?

The benefits a company provides to an employee are known as BiK. In short, when we research what does BiK mean for an employee, BiK stands for benefits in kind. Within this BiK guide, we’ll research the Benefit in Kind rules and discover how BiK works when running a contracting company. What’s more, we’ll investigate the Benefit in Kind meaning and the types of benefits an employer may provide to an employee. Further, we’ll learn how each type of contractor benefit in kind (UK) is taxable on both the employee and employer.

For layman, contractor benefits in kind are not a straightforward area. Indeed, it can be a little confusing if you’re new to this. Therefore, in most cases, a UK contractor running their company will let their accountant look after the BiK (HMRC) reporting each year. However, this guide covers BiK in detail for UK contractors. As a result, as a UK contractor limited company owner, you can see how the system works.

Initial thoughts 

First thoughts

In this guide for UK contractors and small business owners, we’ll investigate various aspects of employer benefits for employees. We’ll define Benefit in Kind and look at the benefits in kind meaning. Moreover, we’ll examine how each company benefit works and how they’re taxable in the UK. Therefore, some areas which we’ll cover on contractor benefits are:

  • What are benefits in kind for contractors in the UK, and what do they include?
  • How does BiK work for contractors, and how do we report this?
  • What is Benefit in Kind tax, and when and how do you pay the tax on a contractor benefit (UK)?
  • What does BiK mean on payslip?

As part of the above, we’ll consider these across different types of employee benefits. In addition, we’ll consider how to calculate Benefit in Kind taxes.

It’s key to remember that HM Revenue & Customs (HMRC) define a Benefit in Kind. When we look at the rules on employment benefits, some specific rules apply to any benefits an employer provides to their employees. To clarify, these rules govern how such benefits are taxable. Indeed, some quite complex rules exist around company benefits for contractors and their respective BiK tax. Therefore, many business owners rely on their accountants to report these to HM Revenue & Customs (HMRC).

BiK shouldn’t be confused with Trivial Benefits. This is an exemption available to directors and employees. In addition, they’re tax-free if the employer spends no more than £50 on the Trivial Benefit expense.

Common questions

As a contractor or business owner, you may question what’s a Benefit in Kind. These could be regarding how BiK works and how you report them or how much the Benefit in Kind tax is. Therefore, such questions on benefits in kind (UK) could include:

  • What does BiK stand for?
  • How does a Benefit in Kind work?
  • Who pays Benefit in Kind tax?
  • Which employee benefits are taxable?
  • Do you pay NI on BiK?
  • How to calculate bik?
  • What’s a P11D form?
  • How does P11D affect the tax code?
  • What is P11D value?
  • Does having a P11D mean I have additional taxes to pay?
  • What is BiK on my payslip?
  • What does BiK payrolled mean?
  • Is BiK deducted from salary?
  • Is Benefit in Kind added to salary?

In this guide, we’ll look at the above and discover what a BiK is and how BiK works. We’ll also look at how to calculate BiK’s and the P11D tax payable as a result.

How Benefit in Kind works

What is Benefit in Kind for contractors?

Firstly, as an employee, you’ll be paid a wage or salary for your time at work. To explain further, this could be monthly or weekly, depending on your employer. However, some employees also receive perks on top of their pay. As a result, these perks are subject to BiK tax. The BiK could include company cars or interest-free loans. On the other hand, it may consist of medical insurance or other benefits.

Please note the tax office’s term for this type of perk is a Benefit in Kind or BiK.

How does BiK work? 

Let’s look at how Benefit in Kind tax works; basically, any contractor BiK your company provides is taxable through your tax code. As a result, your tax code is applied to your salary each week or month. Therefore, when we consider taxable employee benefits, this will affect how much tax you pay on your salary.

As a UK contractor who runs a company, you’ll be a director and shareholder. In addition, you’re an employee, and your company is your employer. Your company will claim for its business expenses throughout the year. However, when we look at how does BiK work, it’s important to remember that BiK may apply if any of these expenses have a personal benefit for you as the employee.

Many years ago, HMRC brought in a £200 benefit for employees provided with a mobile phone by their employer. However, this was later phased out; therefore, a mobile phone is no longer a taxable benefit, providing you use it for business reasons. 

How do you work out the BiK & tax payable upon this?

There’s an employee benefits tax system in place in the United Kingdom. When we consider what is Benefit in Kind tax rate, you and your company will pay the BiK tax upon the BiK. If this system weren’t in place, it would be possible for some employers to pay their employees a BiK instead of a salary in their employment package. Consequently, this would result in less or no tax payable to HMRC.

Income tax and National Insurance (NI) are due on any BiK. The income tax is payable on the BiK at your top tax rate. To clarify, this is because your salary is taxable first, and your benefits are taxable next. Therefore, the tax which applies to wages is:

  • 20% tax on gross annual income up to £50,270. 20% is the basic tax rate and applies to income in the basic rate tax band.
  • 40% tax on gross annual income above £50,270.
  • 45% tax on gross annual income over £125,140.

Therefore, when you receive BiK, the tax rate you’ll pay is one of the rates above, depending on your earnings.

Further details on what BiK is and how it works?

As mentioned, the BiK is taxable on the employee and employer through tax and NICs. It is important to highlight that as a contractor, you are the employee, and your company is the employer. Besides the tax payable on the employee benefit, your company will pay HMRC a National Insurance contributions charge. The rate of employer NI for this is 13.8% upon the value of the benefit. Furthermore, this NI charge is known as Class 1A NIC.

In addition to the BiK being known as perks, some call this fringe benefits of a job. Indeed, in both cases, the employee receives `a benefit’ from the employer. Therefore, this will be taxable upon both the employer and the employee.

To summarise, if you receive any form of payment from your company that benefits you on a personal level and this isn’t `wholly, exclusively, and necessary’ for your business, you’ll likely have received a BiK. In conclusion, the BiK is taxable, preventing you from replacing your salary with another type of benefit.  

How to calculate benefits in kind tax & some typical types of benefit 

What are the types of company benefits? 

When you’re a limited company contractor, and we look at what BiK is, the most common benefits are a company car and a director’s loan.

Some contractors ask how my P11D benefit in kind is calculated for my car. Basically, company car drivers are taxable on the car’s P11D BiK valuation. This term translates to the value of the vehicle per HMRC. The P11D car value is effectively the list price of a vehicle less VAT and less registration fees. The P11D car value is subject to a BiK charge based on its level of CO2 emissions and electric range. As a result, the employee will pay tax on a percentage of the car’s P11D value.

Meanwhile, a director may ask how my P11D benefit in kind is calculated for a director’s loan. The benefit of a director loan is based on the notional interest on the loan’s value. What’s more, the rate of interest currently set by HMRC is 2.25%. As a result, this interest rate is applied to the value of the director loan for the tax year. Consequently, the director will pay tax on the interest, which we calculate.

Other common benefits for UK employees could include:

  • A BiK on medical insurance. Many employees receive this from their employer and, as a result, have a medical insurance Benefit in Kind.
  • A BiK on health insurance.
  • BiK dental.

Detailed list of types of P11D taxable benefits in kind 

Below is a table of the types of benefits which may apply to an employee. Moreover, this table shows the cash equivalents / BiK value for each kind of BiK. In addition, it shows the HMRC BiK rates upon which BiK tax is payable:

The types of BiK / company benefit The cash equivalent and how is BiK calculated in 2023/24 and 2024/25
A company car Company car tax is calculated using the appropriate percentage. This is based on CO2 emissions on a sliding scale. The higher the CO2, the higher the rate that applies. The calculation is the appropriate percentage x the car’s P11D value or list price.
Fuel for a company car £27,800 (in 2023/24 and 2024/25) x the appropriate percentage.
A company van £3,960 (in 2023/24 and 2024/25).
Fuel for a company van £757 (in 2023/24 and 2024/25).
Assets a business provides to an employee that have significant personal use. For example, a motorbike. 20% of value + 20% of annual running costs.
Private medical insurance/health insurance The value of the expense.
Dental cover The value of the expense.
Gym memberships The value of the expense.
Any private costs paid for by the company which aren’t `wholly and exclusively’ for the business The value of the expense.
Loans to company directors There is a BiK when a loan to a director exceeds £10K at any time during the tax year. Most importantly, the BiK is based on the notional interest (2.25% in 2023/24 and 2024/25), which you can calculate based on the loan’s value. However, if the director pays interest to the company at HMRC’s prescribed rates, there will be no BIK.

Other expenses 

You may incur other certain `expenses’ as part of your work. What’s more, these could include:

  • Travel costs.

Ordinarily, you must report these as expenses to HMRC each year.

In contrast, the `expenses’ above aren’t taxable, unlike benefits. However, the rules around each type of benefit and expense are pretty complex. Most importantly, HMRC has guidelines you or your accountant should refer to before deciding if they’re taxable. Therefore, you must report both benefits and expenses to HMRC.

Other aspects 

Benefits in kind reporting -forms P11D, P11D(b) & Class 1A NI 

The employer will report any BIK and expenses it provides to the employees during the tax year on form P11D (benefits in kind). There is a whole series of HMRC technical guides under TCTM04106, which cover how to report BIK. The P11D form reports any expenses and benefits the employer pays for and provides to their employees. Moreover, the P11D(b) form shows the tax on Benefit in Kind and is the declaration to HMRC. Furthermore, the P11D(b) states that the P11D benefits forms are complete and correct. HMRC’s employer guidance (p11D) is worth reading if you complete the forms yourself.

The employer must submit the P11D and P11D(b) forms to HMRC. Importantly, these forms are due for filing with them by 6 July each year. Therefore, for the tax year 2023/24, the P11D(b) and P11Ds are due to HMRC by 6 July 2024.

Furthermore, the employer must pay the Class 1A NI on the P11D Benefit in Kind to HMRC by 19 July. The current rate of Class 1A NIC 2023/24 is 13.8%. This Class 1A NIC rate has been at this level for several years except for a temporary increase in 2022/23. Indeed, this is the same as the employer’s NI rate on salaries above the NI threshold.

Therefore, if your accountant completes the P11D, you must inform them of any BiK each tax year. As a result, they can complete and file the P11D form correctly.

The government has made plans to abolish the P11D process in the future. However, how will you report the benefits? HMRC has announced that from 6 April 2026, it’ll be mandatory to report all benefits in kind, including tax and Class 1A NIC, via the payroll system.

What are payrolling benefits & Benefit in Kind on payslip?

Some employers (especially larger ones with many employees) choose to payroll the benefits they provide. Basically, this is known as `salary sacrifice’, and they include the BiK on their payslip. To explain further, this means the cash equivalent of the benefits is taxable through the employee’s payslip, along with their monthly pay. On the employee payslip, the benefit may show as `BiK’ each month or show a description of the benefit.

The types of payroll benefits often include medical or health insurance. In addition, it may consist of dental insurance or some other kind of benefit. If you receive medical insurance through your employer, you’ll pay `HMRC medical insurance tax’ through the tax, which they deduct from your salary each month.

One advantage of this system for employers who operate it is more straightforward tax codes. As a result, the employer’s HR team will receive fewer employee queries regarding tax. Furthermore, the tax deductions in the monthly payroll are more accurate, and employee tax codes should change less frequently. However, employers should have fewer forms (P11Ds) to complete at the tax year-end.

Conclusion for contractors & small business owners

In conclusion, our final comments concerning contractor benefits in kind for small business owners are:

  • Firstly, when you’re a director running your own business, it’s better to pick up any private costs such as medical insurance, dental cover, and gym memberships personally. As a result, that’ll prevent you and your company from paying the extra tax and NI on these.
  • Secondly, the benefit has a tax bill for both the employer and the employee. The employer will pay 13.8% Class 1A National Insurance in 2023/24 and 2024/25. In addition, the personal tax on benefits in kind for the employee is income tax on their pay. As a result, the income tax is 20%, 40% or 45%, depending on their overall personal taxable income in the tax year in question.
  • Furthermore, when you run a company car, you should consider whether a Benefit in Kind is worth it. It’s usually not beneficial to charge the running of a car through your company. In contrast, this could benefit you if you’ve one of the newer tax-efficient electric cars or hybrid models. This is key because these vehicles often have very low or no CO2 emissions.
  • It’s worth bearing in mind if you take a director’s loan at any point in time, it’s better to pay interest to your company than declare this a taxable benefit. As a result, the loan is tax-free in terms of BiK.

Final thoughts 

In summary, when we look at what is Benefit in Kind (UK) and how does BiK work, the rules aren’t always straightforward regarding taxable benefits and expenses. Indeed, regarding what BiK is, it’s not always clear what falls under BiK. To sum up, if you complete the P11D forms yourself, this guide on the BiK system for contractors should be a helpful reference point. Most importantly, we cover everything necessary regarding employer benefits for employees. In addition, we show how to report these to HMRC and what tax the employer and employee will pay.

You can refer to HMRC’s website if you’re unsure when completing the forms. On the other hand, if you have a good accountant, they’ll usually take care of this for you.

Finally, as director, you have the ultimate duty to report BiK. Therefore, please ensure you or your accountant complete and file the forms correctly and on time each year.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: April 6th, 2024 / Categories: Member Only Articles (Technical!), Running Your Own Company /

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