Subject in a nutshell
In addition to wages and salaries, many reward packages include other items such as the provision of a car, health insurance or childcare. The employer may also choose to pay certain bills on behalf of the employee, eg in respect of a home landline or utility bills. These are often referred to as benefits-in-kind, BIKs or simply ‘benefits’. They need to be considered in terms of PAYE where they are supplied ‘by reason of employment’ which essentially means where they are provided because the employee is an employee.
Are benefits taxable?
Yes, the charge to tax on employment income specifically includes ‘any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth, or anything else that constitutes an emolument of the employment’.
The definition of benefit is very wide and not only covers items provided for the employee but also those provided for their family or household.
How do you value benefits for tax?
There are two main ways to value a benefit: this is either the costs to the employer or there will be a special calculation in the benefits code (a part of the income tax legislation) which covers many of the most commonly provided benefits.
Some benefits have a specific exemption from tax and NIC.
Examples of benefits with specific calculations include:
- Living accommodation
Are benefits subject to NIC?
Any benefits that are exempt from tax are also exempt from NIC.
For most non-cash benefits taxable under the benefits code there is a special class of contribution payable, Class 1A, which is only paid by employers and not employees.
What about benefits provided by a third party that isn’t the employer?
In this case, the benefit may be taxed by the third party provider, by the employer or under the disguised remuneration legislation; please see our commentary on third party benefits for more on this.
What happens where the employer pays for a benefit that is the contractual responsibility of the employee?
An example of this would be the employer paying a phone bill that is in the employee’s name.
This is not taxed as a benefit. Instead, it is treated the same way as it would be for the employer to have given the monetary value of the bill to the employee ie subject to both tax and Class 1 NIC. However, as this money has not directly been given to the employee, the amount is included on the P11D for tax and Class 1 NIC should be paid through payroll in the pay period in which the benefit is provided.
What benefits are exempt from tax and NIC?
There are many benefits which are exempt from tax and NIC subject to meeting criteria. Below is a non-exhaustive list:
- Annual parties and similar annual social events
- Armed forces’ travel to take leave
- Bicycles (provision of bicycles with no transfer of the asset to the employee)
- Board and lodging for home care workers
- Canteen and workplace meals
- Equipment for disabled employees
- Eye tests and other health checks
- Homeworking expenses
- Incidental overnight expenses
- Late night travel home
- Medical treatment abroad
- Mobile phone
- Parking space at or near work
- Pension contributions
- Sports facilities
- Staff training and courses
- Work buses
What if the benefit is supplied via salary sacrifice/an optional remuneration arrangement (OpRA)?
This is generally where there is some form of agreement between the employee and employer that the employee gives up some salary in return for a benefit.
The taxable value of a benefit caught by the OpRA rules is the higher of:
- the cash equivalent of the benefit under the standard calculation under the benefits code, or
- the amount of salary sacrificed / foregone
If an employer provides a benefit which is normally exempt from tax and NIC to an employee which is linked to an optional remuneration arrangement, there may be an income tax and Class 1A NIC charge.
How are benefits reported?
Unless there is an exemption in the legislation, the value of these benefits needs to be reported to HMRC at the year end so that tax and Class 1A NIC can be collected
Class 1A NIC is an employer only charge (there is no corresponding employee NIC charge) on benefits and expenses that have not been subject to Class 1 NIC through the payroll.
This takes the form of a P11D and P11D(b) – specific forms as required by HMRC. A copy of the P11D is also supplied to the employee. The reporting deadline is 6 July following the end of the tax year and payment of Class 1A NIC is made by 19 July (or 22 if payment is electronic).
Tax is collected from the employee based on the value included on the P11D.
What if I don’t want my employee to pay tax on a benefit?
A PSA can be used by the employer to settle the tax and NIC liability arising from the provision of expenses and benefits to employees where they want to cover all the employee’s costs. This process can only be used providing the benefit / expenses are:
- impracticable to operate PAYE on or to value for P11D purposes