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What Is Benefit-in-Kind Tax And How Is It Calculated?

What Is Benefit-in-Kind Tax And How Is It Calculated?

Benefit-in-kind (BiK) tax is a form of tax that is placed on benefits offered to employees by employers. The tax is levied on things like company cars, childcare, accommodation, health insurance, and corporate lunches. The BiK tax is calculated according to the employee tax band. 

The BiK tax is calculated in accordance with the benefit’s value to the employee and takes the tax band into account; it is then paid to HMRC. 

Every expense and benefit is calculated according to unique criteria and employers can check how much BiK tax to pay using an HMRC BiK calculator.

In the following article we outline a definition of benefit-in-kind tax so that you have a better understanding of this employment tax to help you in paying the correct amount of tax.

What Is A Benefit-In-Kind?

Benefit-in-kind is a system of employment perks in the UK that allows employees to give up part of their salary and receive benefits instead. Examples of this include childcare vouchers, health insurance, company cars, gym memberships, and discounted travel to name a few. This form of benefit does not include pensions, flexible spending accounts, and transport.

The advantage of giving up part of a salary for a benefit is the tax incentive as employees don’t pay tax on the benefits.

 

How Does It Work?

Benefit-in-kind options are the employer’s responsibility to set and manage. They involve calculating the value of the benefit and informing HMRC as each employer will need to pay Class 1A National Insurance on the employee benefit.

BiK tax is not taken from the employee’s pay packet directly. Instead the value of the benefit is calculated by HMRC and applied to the employee’s marginal tax rate. The BiK value is then paid to HMRC by the employers and not the employee.

It’s important for the employee to know how much the benefit is worth and what they can expect to see on the payslip.

How Much Tax Gets Paid?

Tax amounts for BiK payments differ depending on the employee’s salary and their tax bracket.

Every benefit-in-kind tax has a unique calculation, and a benefit-in-kind calculator from HMRC can be used to ensure that employers and employees understand the exact amounts for BIK payments. 

For instance, an employee with a company car worth £5,000 will pay £1,000 in tax for the vehicle if they are a basic rate tax pay; that is they pay a rate of 20% for income tax.

Another example at a higher rate of marginal income tax would be an employee company car worth £20,000 and an income tax rate of 40%. It would mean the employee pays £8,000 for their BiK benefit.

The employer might also be liable for national Insurance Contributions for the BiK benefits they offer employees. The BiK is considered part of the employee’s income, even though it is offered by the employee, so the employee must cover any tax outstanding on the benefit, including income tax and NIs.

Benefit-in-kind options are treated exactly the same as an employee salary by HMRC and the amount of tax paid by the employers depends on the employee’s tax status in the company.

For instance, if an employee is offered a BiK company car, the tax paid on the car is calculated according to the car’s value and the employee’s tax band. All BiK tax must be paid by employers to HMRC by the deadline dates.

How Does The Tax Work?

The value of the benefit-in-kind tax is calculated by the employer and added to a P11D form which is then submitted to HMRC. A copy of the form is also sent to the employee. The form clearly shows the benefit and the tax owed which is then taken from the employee salary and paid to HMRC by employers.

The amount of tax paid to HMRC by employers depends on the employee tax band. For instance, an employee in a higher tax bracket will pay 40% or 45% on the benefit-in-kind, while an employee in a lower tax band will pay 20% on the BiK. Either way, the amount is deducted by the employer before the paycheck is issued and sent to HMRC on behalf of the employee.

National insurance must also be taken off the BiK tax and sent to HMRC on behalf of the employee, the BiK is treated as taxable income paid by the employees. There are some exceptions to the rule, in the case of workplace parking and cycle to work schemes, NI contributions don’t need to be deducted.

There is a difference in the percentage amounts paid to HMRC depending on the employee tax bands. For instance, high rate taxpayers contribute 2% NI to the BiK while basic rate taxpayers contribute 12%. As always, these amounts are deducted by the employer and sent to HMRC on behalf of the employee.

It’s also useful to be aware of the criteria for additional rate taxpayers in the UK. If they have a BiK valued at £150,000-200,000 there is an annual surcharge of 25% to bear in mind. If any of these scenarios apply to employees, the responsibility rests with the employer, to plan their budgets.

Pros And Cons

When it comes to benefits-in-kind there are advantages and disadvantages for employers and employees.

Advantages

  • On the plus side, BiKs allow companies to attract and retain talented staff members who appreciate the perks on offer; BiK can influence income advantageously for employees and provide morale boosting motivations. Some employees feel valued by employers thanks to BiK solutions.
  • Employees can save more money if their benefits include housing / transport
  • Employers can attract better employee talent with a great range of employee benefits on offer.
  • Nation insurance liabilities are reduced meaning the scheme is tax efficient.

Disadvantages

  • The downside of offering BiKs is worth considering for employers. While it can boost morale and motivate staff, BiKs can be expensive for the company and increase the administrative obligations. Many employees would prefer cash bonuses so as with most things in business, companies must weigh up the pros and cons of offering certain benefits.
  • A BiK scheme can also reduce the amount of tax they pay on their annual salary. The level of take home pay they receive on a monthly basis will be reduced though which can affect an employees cash flow making it harder for them to pay the bills.
  • There is another drawback to bear in mind for employees using BiK schemes, any benefit they have which is sold in the future is also subject to capital gains tax, which is levied at 20%. It’s therefore very important for employees and employers to carefully consider the pros and cons of BiK schemes initially.

 

Reporting BIK

BiKs are not classed as income for tax purposes, instead they are reported using P11D form by employers; this is the case regardless of the value of the BiK as well as the tax status of the employees.

In the UK, HMRC issues P11D forms that are used to report benefit and expense valuations, in particular benefit-in-kind options acquired from an employer. The P11D form is filed with HMRC on or before 6th July after the end of the tax year the benefits are offered.

HMRC receives the form and checks the right amount of tax has been paid by employers on BiKs. The employees don’t have to deal with a P11D form.

HMRC’s P11D form includes a wide range of BiK options such as company cars, life insurance, private medical insurance, and more; however, there are certain things not included in the P11D form including bonuses, salaries and pension contributions.

Any benefit reported on the P11D form is subject to national insurance and income tax contributions which are taken from the pay by employers and sent to HMRC.

Any employers wishing to offer BiKs to their employees must be familiar with the tax responsibilities around BiKs because they can incur significant penalties if they fail to comply with their reporting duties.

How Do Employers Pay Benefit-in-Kind Tax

In order to calculate and report the right amount of BiK tax, and employee must first determine the value of the employee perk–this can be found on the HMRC website–once this has been determined the employer must withhold the right tax value from the employee’s paycheck and report it to HMRC on time.

There is also a payroll benefit in kind which is another perk offered to employees through their payroll. In this case, the employee’s health insurance, life insurance, or retirement contributions are deducted from the paycheck of the employee allowing the employer to provide employees with lower cost contributions.

  • There isn’t a need for a P11D form employees when tax is paid on their behalf from the payroll.
  • Employers must submit a P11D(b) form to pay any Class 1A National Insurance which is owed.

When the tax year comes to an end, employers must provide employees with a summary of their taxable benefits. P11D forms aren’t sent if the benefit-on-kind is yet to be payrolled, and the deadline is missed.

What Happens If You Don’t Pay The Tax Due?

When a BiK tax is not paid employers can be fined by HMRC;; they can also be fined if the BiK tax form has been filled out incorrectly. It is therefore crucial for employers to understand the nature of BiK options. When a BiK tax is not paid on time, interest also accrues on the outstanding amount to be paid.

In extreme cases where the BiK tax has not been paid or followed up, employers can be at risk of legal action taken against them by HMRC; this might involve court action in the worst case. If you fail to comply with HMRC requests for BiK payments, find and interest will accrue and you end up overpaying.

Find Out More About BiKs

While BiKs are desirable for employers and employees, they must be used responsibly, and it’s important to maintain up-to-date books and HMRC compliance to avoid issues and fines. Whether you are offering or receiving BiKs the burden of responsibility rests on the shoulders of everyone, including the employees benefiting from the perk.

If you are an employee with a BiK perk and you want to find out more about it, the first port of call is your employers. They should have all the details about the perk including how much tax and national insurance you pay on them.

If you want further information, the best resource is the HMRC website where you can find reliable information on BiK perks and discuss your situations with an accountant.

Summary

If you have BiK perks from your employers such as a company car, childcare, or health insurance, it might be helpful to find out more about the nuts and bolts of the benefit.

Everybody has a different tax situation and liability, and you can understand yours better with a benefit-in-kind calculator. Don’t be afraid to contact your employer or HMRC if you have more questions.

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