What are employee benefits?

You can use many different types of employee benefits to put together a comprehensive employee benefits package. Some are considered benefits in kind, while others aren't. We'll consider the definition of benefits in kind more closely shortly. First, we'll look at various employee benefits to give you a feel for what might be regarded as a taxable benefit.

Employee benefits vary, and you can tailor them to suit the needs of your workforce. For example, you might provide insurance so employees can access private medical treatment, receive death-in-service benefits, or cover sick pay when they can't work due to illness or injury. You must pay an insurance premium. Some health insurance policies provide additional perks, such as discounted gym memberships, but you can also seek a corporate membership at a local health club.

A workplace pension for employees is now a legal requirement in the UK, but you can tailor company contributions to suit your budget. Paid annual leave is also a legal requirement. It might not have a direct cost, but you'll need to consider your strategy carefully and decide how much leave to offer.

You can support your team by providing skills training and education to support their career progression, paying their student loans, or offering training scholarships.

Some employee benefits directly relate to their work, but you could consider extending these to offer a personal benefit. For example, employees with company cars may also use them for personal journeys. If they travel by train on business, you could pay for their season ticket.

Benefits in kind are typically benefits that go beyond business expense payments and into personal use.

What is a Benefit in Kind?

P11D benefits in kind are employee benefits that go beyond business-related employee expenses and offer a personal benefit. HMRC defines them as non-cash benefits. If an employer pays an employee more to cover an extra cost, the money is taxed as part of their salary. Benefits in kind have a cash value.

HMRC provides information for employees and employers on the type of perks they treat as taxable benefits and how the process works.

Company cars are a taxable benefit if employees can also use them for personal journeys. Employees pay tax based on the value of the car to them. The amount varies depending on several factors, including the type of company car, whether they have it all the time, and if they pay expenses such as fuel themselves.

Benefits in kind also include private medical cover, which provides access to private healthcare and offers other perks such as virtual GP appointments and membership discounts. If you provide your staff with living accommodation, this may be taxable depending on how much the accommodation costs and why it's needed. HMRC can class financial benefits such as low-interest or interest-free loans or childcare vouchers as taxable benefits depending on how they're paid.

Some perks aren't taxable if employees pay them via a salary sacrifice arrangement, but benefits in kind if they're paid in another way.

How does a benefit in kind impact the tax employees pay?

Employees must pay income tax on benefits in kind that have a taxable value. For example, tax for a company car is typically based on the value of the car benefit, while tax on private medical cover is equivalent to the cost of the monthly or annual premium. They'll also pay tax if you pay the cash equivalent of an expense via payroll or separate bank transfer.

Employees don't typically pay National Insurance contributions on benefits in kind. However, National Insurance is payable for anything paid in cash or with a cash equivalent. These could include gift vouchers or other items employees can sell at face value.

Do employers need to pay tax on benefits in kind?

Generally speaking, employers must only pay tax in the form of National Insurance contributions on benefits in kind. HMRC calculate the tax payable based on the value of the benefit. It's worth remembering that the cost of providing employment benefits is typically an allowable expense for corporation tax purposes, meaning you can reduce your corporation tax bill.

If you offer payrolling benefits via salary sacrifice, such as the workplace nursery scheme or cycle-to-work scheme, these don't attract employers' National Insurance payments.

The rules can be complex and vary depending on the perks and benefits you provide and how your business pays them to employees. You can find a complete list of expense payments and how they're taxed here. Some activities that would usually be considered business expenses can be regarded as benefits in kind in some circumstances. For example, entertaining clients solely for business reasons may be a business expense but becomes a taxable benefit if employees treat a client to dinner for a non-business reason. The distinction can be hard to make, so always seek professional advice from your accountant.

Are there any exemptions?

As we've explained, the tax rules relating to employee perks are complex. However, HMRC guidance states that some benefits are tax-free.

Suppose you have a staff canteen or restaurant providing staff with free or discounted meals. In that case, these aren't typically considered a taxable benefit, although the cost of the meals must be 'reasonable'. You can also provide staff with hot drinks and water. A mobile phone for business use is also tax-free, as are workplace parking spaces. However, the Transport Act 2000 lets local authorities charge businesses in their area a levy when they provide employees with parking spaces.

The staff Christmas party isn't a taxable benefit as long as it costs less than £150 per person and all employees can attend.

Anything solely for business use, such as essential work training, business expenses such as travel or accommodation, and work uniforms or safety clothing, aren't considered taxable benefits either. However, you must ensure there's no personal benefit to your employees; otherwise, they can be taxed.

How do employers report benefits in kind?

There are two ways to report P11D benefits depending on how your business pays them to employees. Employers must report all benefits to HMRC and confirm how much they owe in employers' NI contributions. As mentioned, each benefit is taxed differently, so you must check the rules, preferably seeking advice from your accountant, to ensure you pay the appropriate percentage.

If you pay benefits through payroll, your business will pay tax on them throughout the tax year, meaning you won't have to report these separately. However, you will need to complete a P11D (b) form to confirm how much National Insurance you owe.

You must notify HMRC that you'll be paying tax in this way before 6 April for the coming tax year.

If you don't pay tax on benefits through payroll, you must complete and submit a P11D form for employee tax and NI and the P11D(b) for your NI contributions at the end of the tax year. If you have less than 500 employees, you can use HMRC's online PAYE service. For 500+ employees, you must submit the forms using your payroll software.

Get in touch

We hope this guide has helped you understand how the benefits you offer impact your employees' tax affairs. At Globacare, we offer tailored advice to help you find the best insurance policies to include in your employee benefits package. Contact us for a comparison quote today.

Daryl Collins
Senior Broker

Daryl Collins

Daryl is a senior health insurance broker with over 10 years experience in the industry. Before joining Globacare, we worked closely with employers and their employees, creating bespoke wellbeing schemes.

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