Benefits in kind: Everything you need to know
What are benefits in kind?
Benefits in kind. The term is murmuring through HR circles, but what does it actually mean and is it worth investing time and money in?
Well, benefits in kind, or “perks”, is the part of your take home that is separate to your salary or wages. Commonly these include company cars, childcare vouchers, health insurance, company credit cards, pension schemes, cycle to work schemes, gym memberships, or any vouchers given by employers.
If you’re an employer then it’s worth considering the value of these as an incentive to attract employees, keep your team satisfied, or even as a tool to improve the health and lifestyle of your employees.
Benefits in kind are growing in popularity as a means of boosting morale and showing your employees that you are looking to help them get the best deal.
To fully understand benefits in kind and whether to use them, you’ll need to know what the financial results are and whether they weigh up favourably with the benefits they bring. This article will help you begin to build a comprehensive package of perks with a breakdown of the crucial aspects of benefits in kind.
What counts as a benefit in kind?
Employers can give small gifts and entertainment without reporting this to HMRC. These are to show gratitude for good work, but they cannot be seen as a bonus. They cannot exceed £50 in value per-gift, be paid in cash, or be part of a contract. Trivial benefits can be gift cards, bottles of wine or hampers, and can also include meals.
There is an additional £150 tax-free cap (per employee per year) on what employers can spend on staff entertainment. If you are an employer this type of tax-free benefit in kind can be a really useful way of improving morale in your business, while not affecting anyone’s tax codes.
By the same token, staff meals are a really good way to create tighter more engaged teams. With this in mind, go pop open the bubbly!
Do I need to report benefits in kind to HMRC?
A large number of benefits in kind need to be reported to HMRC. These include company cars, childcare vouchers, health insurance, company credit cards, gym memberships, or any vouchers given out that are worth more than £50.
The rules on how these are taxed and also on how you can report them differ depending on the items. Below are some of the key aspects of this process and (what you’ve all been waiting for) some of the more common benefits and how tax works for these.
What tax do you pay on benefits in kind?
The most important consideration when it comes to more significant benefits is taxation. The reason some benefits packages are taxed is that they are considered of significant enough worth to include as a part of an employees’ salary. However, they’re of hidden financial value, they aren’t normally quoted when you tell someone your salary.
It’s also worth noting that not all employee benefits are taxed equally, and some are exempt. The system is quite complex. For advice on how to set up a benefits in kind package, and how much to offer, there are a bunch of useful, free-to-use tax calculators online. These are a great way to weigh up how best to reward your employees, optimising their reward and minimising their tax bill.
What you’ll notice is that employees will really appreciate a package that is well thought out and reduces the time they have to spend considering income tax and national insurance payments. Remember though that the tax calculators only give you an estimation, reporting any benefits scheme is still necessary even if you used one of the calculators on the ‘.gov’ website.
What is the P11D form?
This is one method of reporting the cash value of your benefits in kind package to HMRC. It is one way that HMRC calculate the income tax and national insurance contributions that are due from your employee benefits package. This form needs to be submitted at the end of every tax year and is available on the ‘.gov’ website.
What is payrolling?
Payrolling is a new scheme launched in 2016 to offer a new voluntary for employers to record benefits in kind. This removes alterations in employees’ tax codes on their payslips, negating any need to phone HMRC to query a tax code. However, it’s your choice as an employer whether you payroll benefits in kind or report them on the traditional P11D form. With this in mind, it’s worth weighing up the benefits of a payroll system.
First thing’s first, you need to look at what benefits you are offering and whether they are eligible for payroll. In general, the types of benefits that will incur taxation are those with regular monthly costs, such as health insurance payments, that are easy to calculate for the payroll system. Things get trickier when dealing with benefits like company cars, where calculating a monthly cost and including it on a payroll is too difficult.
If you are offering benefits from both categories, it’s worth putting some thought into whether you can afford to fund the admin. Running both payroll and the old fashioned P11D forms costs time as well as money. Off the back of this, it’s sensible to ask if you have the infrastructure in place to triage any administrative errors that are part and parcel of running a new system.
Payroll’s advantage is its convenience and efficiency. Once things are up and running it will save time for your accounts team as well as your other employees. There will be benefits to the company from this time saved but not if mistakes are made.
It’s worth remembering that you still have to submit an annual P11D(b) form recording the perks you have given out, but this is something you’ll have to do regardless, even if you opt to stick with the old P11D forms. You’re also obliged to notify your employees if you’re payrolling a benefit before you do so, as the implications for them will be far more acutely felt.
How does tax work for company cars?
Company cars are taxable if they are used for employees’ own personal trips. Sadly, this almost always includes journeys to and from work. The tax that you pay on the car is dependent on what the benefit is judged to be valued at. In this case, it will depend on how expensive the car is.
There are also other factors that will impact the tax payable for company cars. The car’s carbon dioxide emission rating, the type of fuel the car uses and when the car was registered will all alter the cars “worth” in terms of tax. This balanced consideration means that almost all cars used for personal use are taxable benefits. This includes eco-friendly options like electric cars, with zero carbon emissions, will still be taxed but there are discounts to incentivise their use.
Some other things to bear in mind are that roles involving the operation of a van, for carrying equipment and which go home with you will not be taxed, unless used for frequent personal journeys. The bonus of proving to HMRC that the van is not used personally is with the employer which often means you have to ask your employees to record information about their journeys, such as mileage and fuel costs.
If you are disabled, then there are also additional exemptions available. To find out more about this take a look at our blog on company car allowance, or check out the HMRC calculator.
How does tax work for childcare benefits?
Childcare vouchers are not so straightforward. If you have children and pay childcare costs, then the rules for taxation are quite complex.
If your business has an in-house nursery, or you contribute an equal share with other businesses to run a nursery, then this benefit is not taxed. If it’s a benefit in kind, offering a payment direct to a nursery, or issuing your employees' childcare vouchers, then these are exempt up to £55 a week.
However, the cap on this is lower if your employees count as high earners. There is no exemption if you give your businesses employees direct cash payments for childcare.
It is best to be careful on this issue as vouchers may be more tax-expensive to employees than simply using the tax relief for childcare scheme.
Why invest in a benefits in kind package?
A benefits in kind scheme is a versatile and eye-catching means for attracting and retaining employees. To tie down the very best talent in the job market you need to offer more than just a salary. Moreover, from a management perspective, benefits in kind allow employers to give more for less.
A benefits scheme compared to a salary hike can often have a far greater practical value, despite being cheaper per head. They’re also a good way to show your team that you’re looking out for them and their well-being.
Knowing what your employees want is absolutely essential when designing an effective benefits package but it’s equally important to understand the financial implications of different offerings. Knowing that your employees all travel by car to work and that they would appreciate a company car scheme is a good start, however, it’s vital that you do the research into how this might affect them.
Will it be regarded as a success, or has it the potential to leave your staff worse off because of the tax? If it looks like the latter, then perhaps just a plain wage remuneration is a cheaper option for everyone.
Finally, make your teams that you have researched what is in their best interests. This will show that, even if you don’t offer them the employee benefits package with a company SUV to boot, you’re still looking out for them. If they understand the effort you have gone to get them the best deal they will understand that you value them and do their best work. Of course, the perks of perks for the employer is that happy teams are productive teams.