Guide to Benefits in Kind

What are benefits in kind (BIK)?

Non-cash benefits can be a great addition to your total rewards package. BIKs (Benefits in Kind) can include anything that makes employees feel valued, such as gym memberships, mobile phones, cars or even discounts. These are all separate from monetary compensation such as salary, bonus or commission.

Typical benefits can vary, but they usually consist of private medical insurance, company cars, and employee benefits platforms. With the latter, workers get a certain allowance that allows them to pick and choose the benefits that are most relevant for them. These benefits have a taxable value, and it is expected that employees would need to pay taxes on them.

How are employee benefits reported to HMRC?

The benefits can be reported in three ways:

• P11D
• PAYE Settlement Agreement
• Payrolling

P11D

A P11D is a form that is completed annually on a per-employee basis. It’s essentially an end-of-year declaration of any benefits and expenses you have given to the employee throughout the year, which is why it’s super important to keep track of the benefits provided.

The P11D is carefully structured with separate sections for its different benefits and expenses. You'll need to include specific information depending on which benefit you want to report. 

If you have provided private medical insurance, simply enter the annual value of the benefit into the appropriate section. If you provide a company car for your employees, HMRC requires more details about the car, such as make, model, and list price. Additionally, they need the CO2 emissions or electric miles of the vehicle. The data plays an integral role in determining the value of the benefit associated with the car.

Payrolling

Another great option is payrolling if you want to avoid reporting your benefits through a P11D. This process involves reporting the benefits via your payroll every payroll period.

To be able to payroll, employers must sign up for payrolling before the beginning of the tax year, in which they want to include their benefits in their payroll. Once registered, HMRC can be informed of the benefits given to employees each pay period through Full Payment Submission. This eliminates the need to generate P11D forms for employees at the end of every tax year.

💡 Payrolling employees: taxable benefits and expenses - GOV.UK (www.gov.uk)

It's worth noting that certain benefits cannot be processed through payroll. Examples include employer-supplied housing and interest-free and low-interest loans. Therefore, if an employer offers these benefits to an employee, they must still be reported on a P11D, even if other benefits for that employee or the company as a whole are being payrolled. Whether employers prefer to submit their benefits information through payrolling or P11Ds is entirely up to them. They can decide to do a mix of both or submit all benefits on a P11D.

P11D vs Payrolling - The Impact on Employees

Payrolling and P11D may be different ways of reporting taxes, but the amount due remains the same. The difference between them lies in when that amount must be paid.

On a P11D, no benefit is reported in that tax year, so no tax is paid until the following tax year, once HMRC has received a form for the employee and processed it. This means that if, for example, an employee gets a private medical benefit for the first time at the start of a tax year, they will pay tax on just their taxable pay received through the payroll in that tax year, and then in the following tax year will pay tax on the private medical they received in the prior tax year as well. This is usually done by HMRC amending the individual’s tax code to account for the fact that they have had a taxable benefit on which they haven’t yet paid tax.

Essentially, this means someone could give up a benefit in October of one tax year but still have to pay taxes on it in the following tax year, thus effectively paying taxes on a benefit they no longer have.

With payroll processing, the taxes are taken care of in real-time. The value of the benefit is appended to the worker's salary on a regular basis, which increases their taxable income and allows them to pay the right amount of tax each year.

It is the employer's prerogative to decide what method they use to report their benefits to HMRC. If they want to switch from P11Ds to payrolling, they need to be aware that employees may be subject to double taxation during the first year after the transition. They will be taxed in real time for the benefit they have received in that current tax year and will have to pay tax based on the information reported on the P11D for the previous tax year.

P11D(b)

In some cases, added benefits provided to the employer may also result in them having to pay Class 1A National Insurance Contributions. This is paid in addition to the employee's NI contribution.

The total of any benefits provided to employees that are subject to Class 1A National Insurance is totalled up and reported on a P11D(b), along with the value of the Class 1A NI that is due. HMRC sets the exact rate for calculating the Class1A NI. Keep track of all those details to stay in compliance with regulations!

Filing your taxes can be quite a hassle, but companies are in luck; they only need to complete one P11D(b) form for a given tax year! This must be done at the company level, making it that much easier. Payrolling benefits is an excellent way to reduce paperwork, but companies must still submit a P11D(b) to pay Class1A NI. It's important to remember that while the financial cost is being taken care of through payroll, filing a P11D(b) is still necessary.

💡Employers have until the 6th of July to submit any P11Ds and P11D(b)s after the end of each tax year. For example, forms related to the 22/23 year must be handed in by 6th July 2023. There are significant penalties for late submission of either of these forms, so it’s essential that they are submitted on time.

After submitting the P11D(b), employers have to pay the Class1A taxes included in this form. The deadline for these payrolls is July 22nd, following the end of the tax year to which the benefits relate, so there is little time to make a payment if you submit a P11D(b) at the last minute!

Key dates to keep in mind