Benefits in kind are popular elements of many people’s salary packages, and can indeed be the deciding factor for some employees in their initial decision to accept a job offer. While such benefits can be a significant advantage to both employees and employers, the fact that some require tax payment does make them more complex than they may first seem. Find out everything you need to know about how to process benefits in kind in your payroll, and exactly what needs to be submitted to HMRC.
What are Benefits in Kind (BIK)?
Benefits in kind are any benefits given by an employer to their employees or directors, which are not part of their salary or wages. Not all benefits are taxable, however, those that are must be properly declared to HMRC.
Some of the most common BIK examples include company cars, medical or dental insurance, and childcare vouchers. The UK government provides a list of all different benefits, detailing whether or not they are taxable.
Payrolling Benefits in Kind
Including benefits in kind in payroll is a relatively new scheme that was introduced by the UK government in 2016. The purpose of it was to make declaring and paying tax on benefits easier, in comparison to the previous method of submitting annual P11D forms.
One way of filing and paying taxes on benefits is with a P11D form. This involves employers reporting their employees’ benefits to HMRC at the end of the tax year via the form, in addition to filing a P46 car form if a vehicle is being provided for private use.
To determine how much tax is owed, each employee’s tax code is included in the P11D form. It is the employee’s responsibility to check this, and unfortunately, it can be difficult to know if the right code is being used or not. If employees are not using the right code, they could either incur an unexpected bill or receive a rebate.
With this method, employees receiving these benefits pay some tax retrospectively, because tax based on a P11D isn’t paid in real-time, but based on the previous year.
Because P11D forms have caused confusion in this respect in the past, now, many organisations are making the most of a different government system, in which benefits in kind are included in their payroll. This system is designed to make the whole process simpler, which means more time saved and fewer mistakes made.
How to Payroll Benefits in Kind
Any company that uses HMRC-approved PAYE payroll software that includes payrolling BIK functionality is able to move over to this method of tax filing. To do so, the company must register to use HMRC’s payrolling benefits and expenses online service, before the start of the relevant tax year.
Which benefits are taxable?
Employers often choose to give their staff and directors a range of different benefits, either as a reward for their service or to make the role more attractive at the recruitment stage. Because such benefits can be considered as additional salary, both employees and employers might need to pay tax or National Insurance on them. Some of the most popular taxable and non-taxable benefits in kind include:
|Company cars for private use||Living accommodation|
|Fuel provided for personal use||Removal expenses (up to the value of £8,000)|
|Medical insurance||Interest-free/low-interest loans|
Non-taxable benefits still need to be declared using a P11D form.
How is tax declared and paid when payrolling benefits in kind?
Companies that use the payrolling benefits in kind system must declare which benefits they want to put through payroll for their employees, at the point of registration. This then means that HMRC can amend the tax codes for all the necessary employees, in order to charge the correct amount of tax.
After registration has taken place, employers must inform their employees because it means their tax code, and consequentially their take-home pay will be altered. They need to be made aware of which benefits will be going through the payrolling system, the cash equivalent of the benefits, and details of benefits that will not be payrolled.
Working out the taxable amount of a benefit in kind
The taxable amount of the benefit is the same as its cash value. This should then be divided by the number of paydays the employee has annually so that tax is applied appropriately.
An example of this would be a company car that has a cash value of £5,200 each year. For an employee that gets paid weekly, this would work out to £100 per payday. Therefore £100 must be added to their payslip as taxable pay. For an employee that gets paid monthly, £433.33 should be added to their payslip every month.
Any taxable benefits like these that are given to employees must be included in the employee’s actual monthly pay when payroll information is submitted to HMRC. This option needs to be supported by your payroll software provider so that it can properly collect the correct tax due on the benefits given.
What if the value of the benefit changes?
It’s fairly common for benefits such as gym memberships and car costs to change during the year. If this happens, it’s simple to process the change. Use the following method to work out the new taxable amount, using the same example as above, assuming the cash value of the car benefit increased to £6,000 in July:
Jan-Jun: £5,200 / 12 months = £433.33. As this is the value for the first six months of the year, the total is £433.33 x 6 = £2,600, which has already been taxed.
Jul-Dec: £6,000 / 12 months = £500. For the second 6 months of the year, the total is £500 x 6 = £3,000, which is yet to be taxed.
What to do if the employee’s tax is more than 50% of their pay
Current UK tax law says that employers cannot deduct more than 50% tax from their salary. This can be problematic where benefits in kind are concerned. If the inclusion of a benefit in their payroll means that they will likely be taxed more than 50%, there are two choices.
- Exclude the employee’s benefit from payroll, and instead report it using a P11D. This will ensure HMRC incorporates the benefit into their tax code instead.
- Divide the taxable amount of the benefit among more pay periods. This is especially helpful if an employee has an unexpectedly low pay for a month, such as if they were receiving statutory maternity pay.
How to process benefits in kind for new starters
If you recruit a new employee who will receive a benefit in kind from the outset, you need to make sure they are aware of how this will impact their tax. They need to know the following:
- They will pay tax on the benefit in real-time
- Their tax code may be altered but this will not account for benefits in kind
- Their tax code may be altered if they have benefits in kind, PLUS they are already paying back an underpaid tax period.
Advantages of payrolling benefits in kind
While companies still have the choice to either submit P11Ds or payroll benefits in kind, the reason for the introduction of the new scheme is because it is designed to be less complicated and time-consuming. Advantages of payrolling benefits in kind are:
- employers no longer need to submit P11D and P46 forms to HMRC
- simpler tax codes mean HR teams receive fewer queries from employees regarding tax
- tax deductions in monthly payroll will be more accurate
- tax codes for individuals should change less frequently
- fewer forms for employers to complete at year-end
Disadvantages of payrolling benefits in kind
There are, however, a few potential disadvantages to the system. One of the main disadvantages that puts some companies off is the initial registration process. Because this can be complicated, it might not feel worthwhile. Other disadvantages include:
- Within the first two years of payrolling BIK, employees might find they are paying higher tax due to underpayments in previous years. This will end by the third year, however.
- Employers still need to complete and submit a P11D(b) form regardless of whether benefits have been taxed via P11D forms, or via the payrolling system.
Are there deadlines for declaring benefits in kind?
It’s important for employers to be aware of the strict deadlines that HMRC imposes for the submission and payment of tax on benefits in kind. There are different deadlines depending on the method with which tax on benefits is paid.
Deadline for payrolling benefits in kind
Using the payrolling method to pay tax on benefits means that the necessary tax is deducted monthly, so, after this method has been put into place, there are no deadlines to adhere to.
For companies that have not yet moved over to payrolling benefits in kind, there is a deadline for registration. You must register before the start of the tax year that you want to payroll for; that is, 5th April.
Deadline for submitting P11Ds
Companies that choose to submit tax information on benefits in kind using the traditional P11D forms must submit this form to HMRC every year. The deadline is 6th July after the end of the relevant tax year.
Deadline for submitting P11D(b)s
In order to ensure all required Class 1A National Insurance contributions are paid, employers must submit a P11D(b) form for all benefits in kind (regardless of whether they are payrolled or declared with a P11D). The P11D(b) form must be submitted annually, before 6th July after the end of the relevant tax year.
Payrolling Benefits in Kind with FMP
At FMP we understand the importance of simplifying payroll so that your HR teams can concentrate on looking after your employees on a day-to-day basis. For this reason, payrolling benefits in kind is a reporting option that our FMP Payrite software supports. By using this method of benefits declaration, you can ensure your employees pay the correct tax at the right time, avoiding no nasty surprises.