The Accounting Studio guide to
Benefits in kind
Benefits in Kind (BIK) are when you, as an employee or director, receive a something of value from a company that is not in cash. They are sometimes called perks or just benefits.
There is value in these benefits in kind; they are worth something. Had you received cash and paid for it yourself, you would have paid for it out of your after tax income. Because the company is paying for these things on your behalf, HMRC treat it as a benefit in kind, on which you need to pay tax.
It makes sense. If you think about it, without this rule, business owners would just get the company to pay for everything personal. It would leave a huge difference between normal employees and business owners.
Examples of Benefits in kind
Examples of benefits in kind include
- Company cars – where the company provides you with a car to use personally (as well as for business)
- Private medical insurance – where the company pays for this on your behalf
- “Beneficial Loans” – this is often the case where directors/owners have drawn more money out of the business that any could do for dividends, requiring those payments to be treated as a director’s loan. It is also the case when sometimes the company lends money to the director for a large purchase such as a house deposit. If you have not paid interest on this loan, the interest you “should” have paid is considered a benefit in kind. There is a threshold of £10k
- Employee entertainment over £150 per head
There are many many more examples of benefits in kind, but the basic rule is this. If you are getting something from your company that you would have had to pay for yourself, that isn’t wholly exclusively and necessary for the purpose of business , there is a good chance its a benefit in kind.
Not all BIK are taxable and there are quite a few useful benefits that you can take advantage of
How and when are benefits in kind reported to HMRC?
There are basically two ways that you tell HMRC about benefits. The “year” is the personal tax year, running from 6th April to the 5th April. It is not the company tax year.
The first is that they are reported at the end of the tax year via form P11d. The deadline for filing this is the 6th July. The deadline for the company paying any tax it owes is the 22nd July.
The second method is to “payroll” the benefit. This can be done for those benefits that have a regular fixed costs, such as company car, private medical insurance and dental insurance. Effectively this gets added to the payroll and calculated as you go along. The benefit of this is that the tax gets paid as you go through the year, without needing remember to file the P11d or for the company or the employee to pay it
How are benefits in kind taxed?
There are several taxes relating to benefits in kind. The taxes are applied to the “value” of the benefit. The default value is the cost to the company, not the price that the individual would have paid – so if the company can get a bulk deal on something this lower value is the value that is used. There are, however, some specific benefits that have their own calculation of value, most notably company cars. HMRC have a useful calculator to work this out: http://cccfcalculator.hmrc.gov.uk/CCF0.aspx
Company:
The company pays class 1a national insurance on the value of the benefit at 13.8%. Both the cost of providing the benefit, and the insurance are normally tax deductible for company for corporation tax purposes
Income tax
The employee pays income tax on the “value” of the benefit in kind. If the individual prepares a self-assessment tax return they would include it in here. Note individuals only pay income tax on the benefit in kind. They do not pay national insurance on it. Only the company pays national insurance contributions.
If the individual does not complete a self-assessment tax return they will have the tax collected by adjusting their tax code. This means you pay more tax through your salary in the following year as a way of HMRC collecting the additional tax that you owe.
What are the benefit in kind rules then?
There is a general benefit in kind rule, which kicks in if there is not a specific rule. The rule is that the “value” of the benefit is deemed to be the cost to the company, where the company is paying for something on your behalf that you get the benefit of.
Note that this only applies to things that are in the company name. If it’s in your name it actually gets treated as undeclared salary, which is a whole world of different, painful pain.
Assets made available to the employee
If you have use of, say a TV the company has bought, or a yacht if you are lucky, it will be treated as a benefit in kind.
The value is considered to be 20% of the market value of the asset that is taxed. Now there are so many many detailed rules on this (such as what if the asset was only made available for part of the year, or made available to multiple employees.
Do also bare in mind that as well as the value of the asset the direct costs of providing the asset is also taxable – so maintenance, storage, fuel, people costs (eg in the case of, say a company helicopter, the cost of the pilot) – these sorts of things are all taxable benefits associated with the asset.
We often get asked about whether it is ok for the the company to buy two mobile phones, or two computers etc. The key thing to be aware of here is that if the computers/phones etc are purely for business use – there is no personal use element, then an employee or director using two computers/phones for work is completely OK. It is only where the assets are being used in a personal capacity that things become complicated.
Company Van made available for personal use
This is fixed amount set annually be HMRC
Company Car made available for personal use
The value of this is calculated on the basis of the CO2 emissions, and the list price (not the price the company paid!) of the car. Company cars are normally very tax expensive, with the exception of newer ultra-low-emission cars.
We will release an article on company cars soon as this is a complex area that should have its own article really.
Beneficial loan
A beneficial loan is where a company provides a loan to an employee or director of a company and that individual either does not pay any interest, or pays interest at below HMRC’s “official rate of interest” (more on that later). Where this happens HMRC consider the individual to be receiving a non-cash benefit (that of not having to pay interest).
This is quite a common common situation, often arising on director/shareholders where they have paid out more in dividends than there were profits available – what would be known as “illegal dividends”, that then get recategorised as a loan.
Where the loan made is more than £10,000 at any point in the tax year the whole loan becomes subject to the beneficial loan benefit in kind rules.
Are there any benefits that are not taxed?
Yes – there are lots, although many of them have limited value to most people. For instance where you job requires you have accommodation, such as clergymen, or caretakers, the provision of suitable living accommodation is not deemed to be a benefit. It’s not that relevant to most people.
These, however, are my favourite tax free benefits that everyone can potentially take advantage of on one way or another.
Things to watch out for
Benefits in kind can often arise by accident – the unintended outcome of some other transactions. We’ve written a separate article covering this topic which can be found here: Common Errors that can lead to benefit in kind tax bills. The short version is that there are really two common scenarios
- Where you take more out of your business than you are able to as dividends (usually due to forgetting that corporation tax also has to be paid). This creates illegal dividends that are repayable to the company, effectively meaning that the money has been loaned to you.
- Where your company has paid for something for you, unrelated to your job (such as paying for a Spotify subscription, where the subscription is in the company name)
Conclusion
Needless to say, benefits in kind are a really large topic and incredibly complex. The above is really just a summary of some of the key points. The sort version is that if you are getting some sort of benefit from the company it will likely be taxable, or possibly exempt.
