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Benefits in kind are non-cash perks provided by employers that are subject to tax, these are also known as non cash benefits or fringe benefits. From company cars to private healthcare, these benefits have significant tax implications. Understanding these benefits helps employees understand their tax obligations and avoid surprises. Both employers and employees have responsibilities when it comes to reporting these benefits. Getting it wrong can lead to unexpected tax bills or penalties.
What exactly is a Benefit in Kind?
A benefit in kind (BIK) is any non-cash perk or advantage that you receive from your employer which has a monetary value. This is known as a non cash benefit. Benefits in kind include company cars, private medical insurance, interest-free loans, or gym memberships paid for by your employer.
These benefits are considered part of your total pay package, which means most benefits are usually taxable. The tax system treats them as if your employer had given you the cash to buy the benefit yourself. The way these benefits are taxed is based on specific rules set by HMRC, different types of benefits are taxed based on their value and nature according to these specific rules.
Common examples include company cars, private medical insurance, interest-free loans, or gym memberships paid for by your employer. HMRC wants its share of these perks.
Most Common Types of Benefits in Kind
The company car is probably the most well-known benefit in kind. If your employer provides you with a car that you can use personally, you’ll pay tax based on its value and CO2 emissions. The values of these benefits provided are used to determine your taxable amount. Health insurance and private health insurance are also popular non-cash perks. While it’s great to skip NHS waiting lists, HMRC sees private health insurance as a taxable benefit based on the premium your employer pays.
Living accommodation provided by your employer (unless it’s necessary for your job) counts as a benefit in kind. So do interest-free or low-interest loans over £10,000.
Other common benefits provided include mobile phones, laptops for personal use, childcare vouchers, subsidised meals, free or subsidised meals, and regular free meals at work. Some employers offer gym memberships or wellness programs as a service, and certain company-provided services or wellness programs may also be included as benefits. Many of these perks may be considered company expenses.
Some benefits, such as certain meals or cycle-to-work schemes, can be tax free. Employers should plan which benefits to offer based on employee needs and tax implications, and may seek specialized accounting and advisory services to manage reporting and compliance.
How BIK Tax Works in Practice
The tax on benefits in kind isn’t paid directly. Instead, HMRC adjusts your tax code to collect the tax through your regular PAYE salary. This process is known as taxing benefits, and it’s essential that employers are accurate in reporting benefits to HMRC to ensure compliance.
The amount of tax you pay depends on the cash equivalent value of the benefit and your income tax rate (20%, 40%, or 45%). The total value and combined value of all benefits provided by your employer are added to your taxable income and total income, which can affect your tax bracket and overall tax liability. For example, if you’re a basic rate taxpayer with a benefit worth £1,000, you’ll pay £200 in tax.
Your employer also pays National Insurance contributions (currently 13.8%) on the value of the benefits they provide. This is known as Class 1A NI.
I once received a company car without understanding the tax implications. My take-home pay dropped by £200 monthly, a painful lesson in how company car tax and BIK tax work! Company car tax is calculated using bik percentage banding, the car's list price, vehicle tax, and factors such as the first year registration fee (or year registration fee).
The calculations can get complex, especially for cars where the benefit value depends on the car’s list price, CO2 emissions, bik percentage banding, fuel type, and other factors. It’s important to ensure the correct amount of tax is paid.
BIK Tax Reporting Requirements
Employers must report all taxable benefits and expenses in kind to HMRC by submitting P11D forms by 6 July following the end of the tax year. They must also submit a P11D(b) form showing the total Class 1A National Insurance contributions due. Reporting benefits accurately is essential for compliance and ensures correct tax calculations.
The deadline for paying Class 1A NI is 22 July (or 19 July if paying by post). Late payments can result in penalties and interest charges.
Employees should check their P11D forms carefully, as the information will affect their tax code. Good record-keeping is essential, HMRC can ask to see evidence relating to benefits and expenses for up to 3 years, so tracking expenses related to benefits is important for accurate reporting.
Ways to Reduce BIK Tax Liability
Not all benefits provided by employers are taxable, some are tax free if they meet certain criteria. For example, certain perks such as free meals, cycle to work schemes, and in-house sports facilities can be tax free, while others may be subject to tax depending on their use and value. Some benefits are exempt from tax if they meet specific conditions. For example, mobile phones provided by your employer (limited to one per employee) are usually exempt.
‘Trivial benefits’ worth less than £50 aren’t taxable as long as they’re not cash or cash vouchers. They also can’t be part of a salary sacrifice arrangement. Electric and ultra-low emission vehicles have much lower BIK rates. This makes them an attractive option for company car users who want to reduce their tax bill. Salary sacrifice schemes can sometimes be tax-efficient. These let you exchange part of your salary for benefits like pension contributions or cycle-to-work schemes.
Business purposes are important when considering BIK tax. Business-only use of certain items may avoid BIK status altogether, but you must be able to prove there’s no personal use. Remember, not all benefits are treated the same, some are taxable, while others are tax free if used solely for business purposes or if they fall under specific exemptions.
Company Cars and Tax
Company cars are one of the most recognisable benefits in kind, and they can have a big impact on your tax bill. If your employer provides you with a company car that you can use for personal purposes, you’ll need to pay tax on the benefit. The taxable value of a company car is calculated based on the car’s list price, its CO2 emissions, and the type of fuel it uses. For example, petrol cars with higher emissions will push you into a higher tax band, meaning you’ll pay more tax compared to lower-emission vehicles.
The amount of tax you pay is also influenced by your income tax bracket, so higher earners will see a bigger deduction. The tax is usually collected through your PAYE code, making it easy for HMRC to adjust your monthly take-home pay. Employers must report the company car benefit on a P11D form and pay Class 1A National Insurance contributions on the taxable value.
Including a company car in your compensation package can be a great perk, but it’s important for both employees and employers to understand how the value is calculated and how much tax will be paid. Choosing a car with a lower list price or lower emissions can help reduce the overall tax impact.
Electric Cars as a Benefit
Electric cars are quickly becoming a popular choice for company car schemes, thanks to their lower tax rates and environmental advantages. The taxable value of an electric car is worked out in the same way as for petrol or diesel cars, using the car’s list price and emission band, but because electric cars have much lower emissions, the benefit in kind rate is significantly reduced. For example, in the 2025/26 tax year, the BIK rate for electric cars is just 2%, and although this will rise gradually to 9% by 2030, it still represents a substantial saving compared to traditional vehicles.
This lower taxable value means employees can enjoy the benefit of a company car while paying much less tax. Employers also stand to gain, as providing electric cars can reduce their National Insurance contributions and allow them to claim capital allowances on the purchase price. As more businesses look to offer greener benefits, electric cars are an attractive option for both employers and employees who want to keep their tax bills down while supporting sustainability.
Benefits in Kind for Company Directors
Company directors, particularly of small businesses, often face greater scrutiny from HMRC regarding benefits in kind. Director-shareholders need to carefully balance taking benefits versus salary or dividends. Directors should plan their mix of salary, dividends, and benefits to optimize tax efficiency.
For directors of “close companies” (typically family-owned businesses), loans from the company can trigger additional tax charges. These apply if loans aren’t repaid quickly enough. The lines between personal and business use can easily blur for directors. Keeping detailed records is crucial to defend your position if questioned.
HMRC often pays special attention to directors’ benefits during tax investigations. This makes compliance particularly important for this group.
Final Thoughts
Benefits in kind can be valuable perks that enhance your overall employment package. However, they come with tax implications that shouldn’t be overlooked. Understanding what counts as a benefit in kind and how it’s taxed helps avoid unexpected tax bills. The rules change regularly, with HMRC often updating regulations around company cars and technology. Having a clear plan for structuring benefits is essential to minimise tax obligations and ensure compliance.
With proper planning and advice, you can structure benefits to maximise their value. Legitimate exemptions and allowances can help minimise the tax burden. Seeking professional services can assist both employers and employees in managing benefits in kind and meeting all relevant tax obligations.
Pie Tax
Navigating benefit in kind (BIK) tax is much easier when you have the right tools at your fingertips. Pie Tax helps you instantly calculate the real tax impact of different benefits, so there are no surprises. We also help you keep accurate records for HMRC and make smarter decisions about your pay package.
When P11D season comes around, Pie tax simplifies the process with clear guidance. You can add all your BIK information to the app alongside your income, and once everything is complete, submit directly to HMRC, all in one place.
Curious to see how it works? Visit Pie.tax and discover how we’re making tax less taxing for thousands of UK taxpayers.
