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 both 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, during the course of their work. Such benefits include a number of areas where the employee receives some form of benefit from their employer. As a consequence, 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 your own contracting company. What’s more, we’ll investigate the Benefit in Kind meaning and the types of benefits which 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 the layman, contractor benefits in kind are not a straightforward area. Indeed, it can be a little confusing too if you’re new to this. Therefore, in most cases, a UK contractor running their own company 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 an owner of a UK contractor limited company you can see for yourself how the system actually works in practice.

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. What’s more, we’ll look at 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 the 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 also consider how to calculate Benefit in Kind taxes.

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

BiK shouldn’t be confused with Trivial Benefits. These are 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 have questions around what’s a Benefit in Kind. These could be in respect of how BiK works and how you report them, or indeed how much is Benefit in Kind tax? 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 tax code?
  • What is P11D value?
  • Does having a P11D mean I have additional tax 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 take a look at the above and find out what is a BiK and how BiK works. We’ll also look at how to calculate BiK’s and the P11D tax which is 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. Basically, this could include company cars or interest free loans. On the other hand, it may consist of medical insurance or perhaps other types of benefits.

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

How does BiK work? 

Let’s now look at how does Benefit in Kind tax work, Basically, any contractor BiK which your company provides to you 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’ll affect how much tax you pay on your salary.

As a UK contractor who runs your own company, you’ll be a director and shareholder. In addition, you’re also 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 bear in mind that BiK may apply if any of these expenses have a personal benefit for you as the employee.

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

How to work out the BiK and tax which is 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. Basically, if this system wasn’t in place, it would be possible for some employers to pay their employees a BiK instead of a salary in their employment package. As a consequence, this’d result in less or no tax being payable to HMRC.

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

  • 20% tax on gross annual income up to £50,270. Basically, 20% is the basic rate of tax and this 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 £150K (in 2023/24, the 45% rate will apply to income over £125,140).

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

Further details on what is BiK and how does it work

As we mention earlier, the BiK is taxable on the employee and the employer by way of tax and NICs. Important to highlight, as a contractor, you are the employee, and your company is the employer. Besides the tax payable on the benefit by the employee, your company will pay HMRC a National Insurance contributions charge. Basically, the rate of employer NI for this 13.8% (14.53% in 2022/23) 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 also call it fringe benefits of a job. Certainly, in both cases a `benefit’ is received by the employee from the employer. Therefore, this’ll be taxable upon both the employer and employee.

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

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

The types of company benefit 

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

Some contractors ask how is my P11D benefit in kind 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 car per HMRC. Basically, the P11D car value is effectively the list price of a vehicle less VAT and less the registration fees. The P11D car value is subject to a BiK charge which in turn is 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 is my P11D benefit in kind calculated for director’s loan? Basically, the benefit of a director loan is based on the notional interest on the value of the loan. 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.

A detailed list of the types of P11D taxable benefits in kind 

Below is a table of the types of benefits which may apply to an employee. What’s more, this table shows the cash equivalents / BiK value for each type 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
A company car Company car tax calculated on the appropriate percentage. Basically, this is based on CO2 emissions on a sliding scale. The higher the CO2, the higher the percentage that applies. The calculation is the appropriate percentage  x the car’s P11D value or list price.
Fuel for a company car £27,800 x the appropriate percentage.
A company van £3,960.
Fuel for a company van £757.
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 upon the notional interest (2.25% in 2023/24) you can work out upon the value of the loan. However, if the director pays interest to the company at HMRC’s prescribed rates, there’ll be no BIK.

Other expenses 

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

  • Travel costs.

Ordinarily, you’ll also need to report these to HMRC each year.

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

Other considerations 

Benefits in kind reporting -forms P11D and P11D(b) and 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 are 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. What’s more, 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. Also, HMRC’s employer guidance (p11D) is worth reading if you’re completing the forms yourself.

The employer must submit the P11D and P11D(b) forms to HMRC. Importantly, these forms need filing with them by 6 July each year. Therefore, for the tax year 2022/23 the P11D(b) and P11D’s are due to HMRC by 6 July 2023.

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 2022/23 is 14.53% (the Class 1A NIC rate has decreased to 13.8% in 2023/24). Indeed, this is the same as the employer’s NI rate on salaries above the NI threshold. Prior to the Budget changes in 2022, the rate was 13.8% and the blended rate for 2022/23 is 14.53%.

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.

Payrolling benefits and Benefit in Kind on payslip

Some employers (especially larger ones with lots of employees) choose to payroll the benefits they provide. Basically, this is also known as `salary sacrifice’ and they’ll include the BiK on their payslip. To explain further, this means that 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 it may actually show a description of the benefit.

The types of payroll benefits often include medical or health insurance. In addition, it may include dental insurance or some other type 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 of the advantages of this for employers who operate this system is simpler 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 also have fewer forms (P11Ds) to complete at the tax year-end.

Conclusion for contractors and small business owners

In conclusion, our final comments in respect of contractor benefits in or small business owner are:

  • Firstly, when you’re a director running your own business, it’s better to make sure you pick up personally any private costs such as medical insurance, dental cover, and gym memberships. As a result, this’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. Basically, the employer will pay 14.53% (13.8% in 2023/24) Class 1A National Insurance. In addition, the personal tax on benefits in kind for the employee is income tax on their pay. As a result, the income tax will be at 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’ll need to consider is Benefit in Kind worth it? Basically, 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 to note because these vehicles, more often than not, have very low or no CO2 emissions.
  • It’s worth bearing in mind that 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, when it comes to what is BiK, in the same vein it’s not always necessarily 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 to consider in terms of 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, the ultimate duty for reporting BiK falls with you, as a company director. Therefore, please ensure that 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: January 4th, 2024 / Categories: Member Only Articles (Technical!), Running Your Own Company /

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