What is a Benefit in Kind

Introduction 

This article gives an insight into what are taxable benefits in kind. In addition, it also looks at how to calculate the tax upon these. Important to note, certain rules apply to 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 (BIK). Therefore, many business owners rely on their accountant to report these to HMR Revenue & Customs (HMRC).

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

However, some employees will also receive so-called perks on top of their pay. Notably, this could include a company car. Alternatively, it may include medical insurance or perhaps other types of benefits.

Please note, the official term that the tax office gives for this type of perk, is a BIK.

Initial thoughts

Any BIK that 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 who is 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, if any of these expenses have a personal benefit for you as the employee, BIK may apply.

How to calculate BIK and the tax upon this

You and your company will need to pay tax on the BIK. Please note, if this system was 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 been payable to HMRC.

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

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 a National Insurance contributions charge to HMRC. Please note, 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 which 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, company car drivers effectively pay tax on a percentage of the list price of the vehicle. Meanwhile, the benefit of a director loan is based on the notional interest on the value of the loan.

Detailed list

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 common benefits The cash equivalent and how to calculate benefit in kind in 2021/22
A company car   Company car tax is calculated on the appropriate percentage (this based on CO2 emissions on a sliding scale with the higher the CO2, the higher the percentage that applies) x the car 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, when a loan to a director exceeds £10K at any time during the tax year, there is a BIK. 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 also 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, it is important that you report both benefits and expenses to HMRC.

Form P11D and P11D(b) and Class 1A NI

You will need to report any BIK and expenses that are provided to you, the employee, during the tax year, on form P11D. In fact, form P11D is used to report any expenses and benefits that the employer pays for and provides to their employees. Please note, the P11D(b) is the declaration to HMRC which states that the P11D’s are complete and correct.

Key to note, the employer needs to submit the P11D and P11D(b) forms to HMRC. These forms need filing with them by 6 July each year.

Furthermore, the employer also needs to 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 rate as the employer’s NI rate on salaries above the NI threshold.

Therefore, if your accountant is completing the P11D, you must inform them of any BIK each tax year. As a result, you can ensure that the P11D form is then completed and then filed correctly.

Payrolling benefits

Some employers (especially larger ones with a number of employees) will choose to payroll the benefits that they provide to their employees. 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 queries from employees regarding tax. Furthermore, the tax deductions in the monthly payroll will be more accurate and tax codes for the employees should change less frequently. There should also be fewer forms (P11D’s) for employers 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 avoid you and your company having to pay 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 be to your benefit if you have one of the newer tax-efficient electric or hybrid models. Key to note, the reason for this is due to the fact that these vehicles more often than not have very low or no CO2 emissions.
  • It is worth bearing in mind if at any point in time you take a director’s loan, it is better to pay interest to your company, compared to declaring this a benefit in kind. Then, the loan will be tax free in terms of BIK.

Final thoughts

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

If you are unsure when completing the forms, you can also refer to HMRC’s website. 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 director of your own company, please make sure 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: March 19th, 2021 / Categories: Member Only Articles (Technical!), Running Your Own Company /

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