What is a Benefit in Kind and how does BIK work

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Introduction 

What are benefits in kind (BIK) and how does benefit in kind work? In short, BIK are benefits provided by an employer to an employee and these are subject to BIK tax. Therefore, what is BIK tax and how do we calculate the tax on benefits in kind?

It is important to note that HM Revenue & Customs define what is a benefit in kind. In addition, specific rules apply to any benefits that an employer provides to their employees. To clarify, these rules govern how such benefits are taxed. Indeed, some quite complex rules around benefits in kind and their respective BIK tax exist. Therefore, many business owners rely on their accountants to report these to HMR Revenue & Customs (HMRC).

What is benefit in kind?

Firstly, as an employee, you will be paid a wage or salary for your time at work. In short, this could be monthly or weekly, depending on your employer.

However, some employees will also receive so-called perks on top of their pay and these 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’ for this type of perk is a Benefit in Kind or BIK.

Initial thoughts -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, this will affect how much tax you pay on your salary.

As a contractor running your own company, you will be a director, shareholder, and employee in this. In addition, your company is also your employer. Therefore, your company will claim for its business expenses throughout the year. However, 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 upon this

There is a benefit in kind tax system in place. Therefore, 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. Consequently, this would result in less or no tax being payable to HMRC.

Key to note, tax and National Insurance (NI) is due on any BIK. The Income Tax is payable on the BIK at your top rate of tax. Notably, this is because your salary is taxable first, and your benefits are taxable on top of this. The tax that 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 the BIK and how this works

As mentioned, the BIK is taxable on the employee and the employer. To clarify, as a contractor, the employee is you, and the employer is your company. Therefore, your company will also pay HMRC a National Insurance contributions charge. Please note that this is calculated at 15.05% upon the value of the benefit. Furthermore, the NI charge is called Class 1A NIC.

Note, besides BIK being referred to as perks, it can also be known as `fringe benefits’ of a job.

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 contractor, the most common types of benefits are a company car and a director loan.

Please note that company car drivers are taxed on the car’s P11D value. This term translates to the value of the car per HMRC. The P11D car value is effectively the list price of a vehicle less VAT and less first registration fees. 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. The employee will pay tax on the official notional interest rate set by HMRC, which is currently 2.5%.

Detailed list of the types of 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. 

The types of BIK The cash equivalent and how to calculate the benefit in kind in 2021/22
A company car Company car tax is calculated on the appropriate percentage (this is based on CO2 emissions on a sliding scale with 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, e.g., 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 that are paid for by the company which are not `wholly and exclusively’ for the business
The value of the expense.
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 -form 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). Form P11D reports any expenses and benefits the employer pays for and provides to their employees. Please note that P11D(b) shows the tax on benefit in kind and is the declaration to HMRC, which states that the P11Ds are complete and correct.

The employer must submit the P11D and P11D(b) forms to HMRC. These forms need filing with them by 6 July each year.

Furthermore, the employer must pay the Class 1A NI on the BIK 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.

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. 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. Employers should also have fewer forms (P11Ds) to complete at the tax year-end.

Conclusion

In conclusion, our final thoughts at the end of this article for you as a contractor 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 (15.05% Class 1A National Insurance) and the employee (income tax 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. Then, the loan will be tax-free in terms of BIK.

Final thoughts

In summary, the rules are not always very straightforward regarding taxable benefits and expenses. Indeed, in the same vein, it is not necessarily easy to comprehend when you need to report these. Notably, if you complete the forms yourself, this guide should be a helpful reference point.

You can also 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, as the ultimate duty for reporting BIK falls with you, as a company director, please ensure that the forms are completed and filed correctly and on time.

Link to Contractor Advice UK group on

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

Published On: August 1st, 2022 / Categories: Member Only Articles (Technical!), Running Your Own Company /

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