Accounting for benefits in kind – Best practice with Snezana Treikale

25/05/2024

From company cars to private medical insurance, and from travel expenses to childcare vouchers, benefits in kind (BIK) provide an excellent way to remunerate your employees.

However, these benefits are subject to taxes and other reporting requirements despite not being part of the direct monetary salary that an employee receives.

Identifying benefits in kind

Snezana Treikale, our Payroll Director, explains: “The initial challenge for any employer is accurately identifying which perks provided to employees qualify as BIK and are, therefore, subject to tax via the payroll system.”

The criteria for BIK can vary, with some benefits being taxable under certain conditions and exempt under others.

Payroll departments must be up-to-date with HM Revenue & Customs’ (HMRC’s) rules to ensure correct classification and consideration of BIKs for tax purposes when issuing pay and reporting earnings.

This is particularly the case when it comes to company cars, which are subject to a variety of criteria that affect the BIK value.

Valuing benefits in kind

Once you’ve identified 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.

Snezana advises: “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.”

Other benefits, such as private medical insurance, are valued based on the cost to the employer. Accurate valuation is essential to avoid underestimating 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 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 just around the corner on 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 normal income.

Additionally, regardless of whether the benefits are accounted for in the payroll, the employer must submit a P11D(b) form, summarising the overall amount of Class 1A NICs due on the benefits provided.

This form declares the employer’s total liability for NICs on the BIKs provided. Failing to submit these forms accurately and on time can lead to penalties, so 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 the need to submit a P11D form to report the benefits provided to employees, you can account for BIK within the payroll process.

With the payrolled benefits arrangements, the taxable value of the benefit you provide to your employees is added to their taxable pay in the payroll.

The income tax due is deducted from their gross pay in real-time and paid to HMRC.

As an employer, you will be responsible for the Class 1A NICs, which are payable on most benefits provided to employees.

Snezana advises: “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.”

Payrolling BIK is set to become compulsory for all from April 2026. Further consultation is currently underway on this change, but employers should start to prepare now for the impact that this will have on their reporting procedures.

Understanding your liabilities

Understanding the liabilities linked to BIKs is vital for any employer, including both the NICs payable by the company 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 Snezana.

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.

Snezana adds: “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.

“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.”

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 tailored guidance based on your unique circumstances, please get in touch with Snezana Treikale by calling  +44 (0)1727 838 255 or emailing snezana.treikale@wmtllp.com.