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Introduction
What are Benefits in Kind and how does Benefit in Kind work? In short, when we look at what does BiK mean, it stands for Benefits in Kind. To clarify, benefits may be provided by an employer to an employee during the course of their work. As a result, the BiK and are subject to BiK tax under the UK tax system. Therefore, what is BIK tax and how does BiK work for limited company contractors? In addition, how do we calculate the tax on Benefits in Kind?
Within this guide we will take a look into this and how how does BiK work in practice. In addition, we will also consider the types of benefits which an employer may provide to an employee. Further to this, we will consider how each type of benefit is taxed on both the employee and employer.
Benefits in Kind are not a straightforward area to follow for the layman. In fact, it can be a little confusing too if you are new to this. Key to note, in most cases a UK contractor will let their accountant look after the BiK reporting each year. However, this guide covers this area in more detail. As a result, UK contractors can see for themselves how the system actually works in practice.
Initial thoughts
In this guide for UK contractors and small business owners, we will investigate various aspects of employer benefits for employees. We will look at how they work and how they are taxed in the UK. Therefore, some areas which we will cover are:
- What are Benefits in Kind for contractors in the UK? In addition, and what do they include?
- How does BiK work for contractors? Also, how do we report this?
- What is Benefit in Kind tax? Further, when and how do you pay the tax?
As part of the above, we will consider these across different types of employee benefits. In addition, we will also consider how to calculate Benefit in Kind taxes.
It is important to note that HM Revenue & Customs define what is a Benefit in Kind. When we look at how does BiK work, there are specific rules which apply to any benefits that an employer provides to their employees. To clarify, these rules govern how such benefits are taxed. Indeed, there are some quite complex rules around Benefits in Kind and their respective BiK tax which exist. Therefore, many business owners rely on their accountants to report these to HMR Revenue & Customs (HMRC).
Initial considerations
What is Benefit in Kind?
Firstly, as an employee, you will 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 will also receive so-called perks on top of their pay. As a result, these perks will be subject to BiK tax. Notably, this could include a company car. Alternatively, 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 Benefit in Kind works
How does BiK work? Notably, any BiK which is provided 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 how does BiK work, this will affect how much tax you pay on your salary.
As a UK contractor who runs your own company, you will be a director and shareholder. In addition, you are also an employee and your company is your employer. Therefore, your company will claim for its business expenses throughout the year. However, when we look at how does BiK work, it is key to note that BiK may apply if any of these expenses have a personal benefit for you as the employee.
How to calculate the BiK and the tax which is payable upon this
There is a Benefit in Kind tax system in place in the United Kingdom. When we consider what is Benefit in Kind, you and your company will need to pay the BiK tax upon the BiK. Please note, if this system were not 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 would result in less or no tax being payable to HMRC.
Income tax and National Insurance (NI) is due on any BiK. Notably, 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.
- 40% tax on gross annual income above £50,270.
- 45% tax on gross annual income over £150K.
Benefits in Kind -further details on what is BiK and how does it work
As mentioned earlier the BiK is taxable on the employee and the employer. Important to highlight, as a contractor, the employee is you and the employer is your company. Besides the tax payable by the employee, your company will pay HMRC a National Insurance contributions charge. Please note, this is calculated at 15.05% upon the value of the benefit. Furthermore, the NI charge is called Class 1A NIC.
In addition to the BiK being referred to as perks, it can also be known as `fringe benefits’ of a job. Key to note, in both cases a `benefit’ is received by the employee from the employer. Therefore, this will 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 is likely that you will 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 and the typical types of benefit
The types of benefits
When you are a limited company contractor and we look at what is BiK, the most common types of benefits are a company car and a director loan.
Please note, company car drivers are taxed on the car’s P11D value. This term translates to the value of the car per HMRC. Notably, the P11D car value is effectively the list price of a vehicle less VAT and less first registration fees. As a result, the employee will pay tax on a percentage of the car’s P11D value.
Meanwhile, the benefit of a director loan is based on the notional interest on the value of the loan. Key to note, the employee will pay tax on the official notional interest rate set by HMRC, which is currently 2.5%.
A detailed list of the types of taxable Benefits in Kind
Below is a list of the types of benefits that may apply. Key to note, this also shows their cash equivalents / BiK rates upon which BiK tax is payable:
| The types of BiK | The cash equivalent and how is BiK calculated in 2022/23 | |
| A company car | Company car tax is calculated on the appropriate percentage. Key to note, this is based on CO2 emissions on a sliding scale. The higher the CO2, the higher the percentage that applies x the car’s P11D value or list price. | |
| Fuel for a company car | 25,300 x the appropriate percentage. | |
| A company van | 3,600 | |
| Fuel for a company van | 688 | |
| Assets that 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 |
| |
| Gym memberships |
| |
| Any private costs that are paid for by the company which are not `wholly and exclusively’ for the business | ||
| ||
| Loans to company directors | Please note that 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 that 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 will 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 will also need to report these to HMRC each year.
In contrast, unlike benefits, the `expenses’ above are not taxable. However, the rules are 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 are taxable or not. Therefore, you must report both benefits and expenses to HMRC.
Benefits in Kind reporting -forms P11D and P11D(b) and Class 1A NI
The employer will need to report any BIK and expenses provided to the employees, during the tax year, on form P11D (Benefits in Kind). Notably, the P11D form reports any expenses and benefits the employer pays for and provides to their employees. Please note that the P11D(b) form shows the tax on Benefit in Kind and is the declaration to HMRC. Key to note, the P11D(b) states that the P11D benefits forms are complete and correct. HMRC’s employer guidance (p11D) is worth reading if you are 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 is 15.05%. Notably, 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, you can ensure that the P11D form is completed and filed correctly.
Payrolling benefits
Some employers (especially larger ones with a number of employees) will choose to payroll the benefits they provide. Notably, this is also known as `salary sacrifice’. To clarify, this means that the cash equivalent of the benefits will be taxed through the employee’s payslip, along with their monthly pay.
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 will be more accurate, and employee tax codes should change less frequently. Key to note, employers should also have fewer forms (P11Ds) to complete at the tax year-end.
Conclusion
In conclusion, our final comments for you as a UK contractor limited company or small business owner are:
- Firstly, when you are a director running your own business, it is better to make sure that you pick up personally any private costs such as medical insurance, dental cover and gym memberships. As a result, this will prevent you and your company from paying the extra tax and NI on these.
- Secondly, the Benefit in Kind has a tax bill for both the employer and the employee. Notably, the employer will pay 15.05% Class 1A National Insurance. In addition, the 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 income in the tax year in question.
- Furthermore, it is usually not beneficial to charge the running of a car through your company. In contrast, this could benefit you if you have one of the newer tax-efficient electric or hybrid models. This is key to note because these vehicles, more often than not, have very low or no CO2 emissions.
- It is worth bearing in mind that if you take a director’s loan at any point in time, it is better to pay interest to your company than declare this a Benefit in Kind. As a result, the loan will be tax-free in terms of BiK.
Final thoughts
In summary, when we look at what is Benefit in Kind, the rules are not always very straightforward with regard to taxable benefits and expenses. Indeed, when it comes to what is BiK, in the same vein it is not always necessarily clear what falls under BiK. Notably, if you complete the P11D forms yourself, this guide 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 are unsure when completing the forms. On the other hand, if you have a good accountant, they will 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 the forms are completed and filed correctly and on time.
Link to Contractor Advice UK group on
