From company cars to private medical insurance and travel expenses to childcare vouchers, benefits in kind (BIK) serve as a great way to remunerate your employees.
However, just because they are not part of the direct monetary salary that an employee receive, doesn’t mean they aren’t subject to taxes and other reporting requirements.
As Helen Jones, Partner, points out: “The initial challenge for any employer is to accurately identify which perks provided to employees qualify as BIK and are therefore subject to tax via the payroll system.”
The criteria for this can vary, with some benefits being taxable under certain conditions and exempt under others.
“As you may imagine, it’s crucial for payroll departments to be equipped with up-to-date information on HMRC regulations to ensure correct classification as a result and to consider BIKs for tax purposes when issuing pay and reporting earnings,” Helen adds.
After correctly identifying which assets class as BIK, the next step is determining their monetary value, which is crucial for calculating the correct amount of tax and National Insurance Contributions (NICs) that apply.
The method for assessing the value of BIK often depends on the specific type of benefit.
For instance, the value of a company car for tax purposes is determined based on the car’s list price and its carbon dioxide emissions.
As a side note, Helen says: “It can often be beneficial to explore electric car options to reduce the tax owed by offsetting some of the costs associated with emission producing cars.
“In some cases, electric cars can also be written off as Enhanced Capital Allowances as part of your wider business investment strategy – but that’s a conversation for another time.”
Other benefits, like private medical insurance, are valued based on the cost to the employer.
Accurate valuation is essential to avoid under or overestimating tax liabilities so you should speak to a professional tax adviser about this before proceeding.
Reporting to HMRC
Accurate reporting of BIK to HMRC is essential and requires meticulous record-keeping throughout the fiscal year by both your payroll department and the senior management team.
As an employer, you must report BIK on each employee’s P11D form – the next deadline being 6 July 2024 – if the expenses and benefits are not accounted for in the payroll process.
The P11D form details the value of each benefit provided to an employee that is not put through payroll as a normal income.
Additionally, regardless of whether the benefits are accounted for in the payroll, the employer must submit a P11D(b) form, which summarises the overall amount of Class 1A NICs due on the benefits provided.
This form essentially declares the employer’s total liability for NICs on the BIKs that have been provided.
Failing to submit these forms accurately and on time can lead to penalties so, once again, it’s very important that you speak to your accountant or tax adviser about this reporting requirement.
Incorporating BIK into your payroll process
To avoid needing to submit a P11D form to report the benefits provided to employees, you can account for BIK within the payroll process.
To manage BIK effectively within payroll, employers need to adjust each recipient’s tax code to reflect the value of the benefits they receive.
This adjustment ensures that the correct amount of tax is deducted from the employee’s salary.
Additionally, employers need to account for Class 1A NICs, which are payable on most benefits provided to employees.
These contributions are paid by the employer and do not reduce the employee’s earnings but must be calculated and paid annually.
Incorporating these figures into the payroll system accurately is essential for maintaining compliance and ensuring that all tax obligations are met.
Helen Jones says: “You may need to consider training or retraining your payroll team on the subject, but we often find that outsourcing this responsibility to a qualified payroll specialist is the best option for most businesses.”
Understanding your liabilities
Grasping the liabilities linked to BIKs is vital for any employer, including both the NICs payable by the company as a whole and the tax implications for each employee receiving the benefits.
“As the employer, your main liability arises from Class 1A NICs, which are calculated at a rate of 13.8 per cent on the total taxable value of the BIKs, payable annually by 6 July following the end of the tax year in which the benefits were provided,” says Helen.
Employees, meanwhile, must consider (and be educated about) the impact of BIKs on their taxable income, as the value of these benefits is added to their salary, potentially pushing them into a higher tax bracket where they are taxed at rates of 20, 40, or 45 per cent depending on their total income.
For example, if an individual is at the top end of the basic Income Tax threshold (£50,270), receiving BIKs may push them into the higher Income Tax band, thereby increasing their tax rate from 20 to 40 per cent.
Helen Jones says: “It is crucial for businesses to accurately forecast the financial impact of these BIKs, including preparing for the cash flow impact of Class 1A NICs and considering the broader payroll budgeting implications.”
She adds: “Mismanaging or misreporting your BIKs can lead to severe financial penalties from HM Revenue and Customs (HMRC), trigger tax inquiries, and result in additional scrutiny and potential charges if discrepancies are found.”
Therefore, maintaining compliance and ensuring accurate reporting and valuation of BIKs are essential to avoid these risks, with regular consultations with tax advisers or accountants recommended to stay informed of relevant legislative or HMRC practice changes.
For further information on BIKs, or for tailored guidance based on your unique circumstances, please get in touch with one of our team.
