A Guide To How To Calculate Tax On Benefits In Kind.

Benefits in Kind (BIKs) are non-cash advantages or facilities that employees obtain from their employers by virtue of their employment. These benefits are provided in addition to their regular salary. These benefits can include company cars, private health insurance, interest-free loans, and more. Nevertheless, while benefits in kind accompany significant advantages for employees, they are also subject to taxation since they uplift an individual’s overall earnings. Thus, this blog is meant to be a thorough guide to understanding how to calculate tax on benefits in kind so you can ensure tax compliance with HMRC regulations and avoid any undesirable tax liabilities.

 

 

A Quick Look At The Benefits In Kind

In brief, benefits in kind are perks or incentives that employees receive from their employer that hold monetary value but are not paid as cash. As stated, since BIKs hold monetary value, they are taxable and must be reported to HMRC. Further elaborating, the tax on BIK is the tax that an individual is liable to pay on benefits they attain apart from their regular salary, such as company car and its fuel, private medical insurance, and Gym membership.

It is noteworthy that the prime purpose of BIK tax is to ensure that all individuals receiving those benefits pay tax on their full compensation package, including any non-cash incentives their employer provides, not just their regular salary.

How To Calculate Tax On Benefits In Kind?

According to the HMRC requirements, taxable benefits need to be included in an employee’s total earnings for Income Tax and NICs. It signifies that BIKs can attract income tax, employee National Insurance as well as employer’s NI. Now, the following steps will expound on how to calculate tax on benefits in kind:

Identify Which Benefits Are Taxable

First of all, before calculating the tax on benefits in kind, it is mandatory to distinguish between the taxable and non-taxable benefits in kind. Fortunately, HMRC has elaborated on the taxable benefits and the ones which are tax-free. Therefore, you can identify the taxable benefits for the calculation of tax on them.

Calculate The Taxable Value

It is important to highlight that each benefit in kind has a different valuation method. The amount of tax you pay depends on what kind of benefits you are  getting as an employee and what their value is. As a result, since the value of each BIK varies, employers first determine whether a benefit is taxable and then find its corresponding value to work out your tax. It can further be understood with the help of the following taxable benefits in kind:

Company Cars

If you are using the company’s car privately, it comes under the ambit of a taxable benefit as per HMRC. Now, its corresponding tax is calculated based on the factors like how much it would cost to buy,  the type of fuel it uses and its CO2 emissions.

Private Health Insurance

The total cost that an employer pays is considered the taxable amount.

Low-Interest Or Interest-Free Loans

If an employee secures a loan from the company and it exceeds £10,000, the relevant tax is calculated based on the difference between the interest charged by the employer and HMRC’s official interest rate, which is 2.25% for 2025.

For further assistance on the non-interest-free loans, go to the Government Website:

Add The Benefit-In-Kind Value To Employee’s Annual Income

It is noteworthy for an employee that their employer charges income tax on benefits in kind they receive. To calculate how much income tax you will be charged, you will apply your personal income tax rate band to the taxable value of your BIKs. In brief, the income tax rates are

• 20% for basic rate.
• 40% for a higher rate.
• 45% for additional rate.

See in detail which tax band your annual income falls into to learn which income tax rate you will apply to your benefits in kind. Next, after calculating the tax on benefits in kind, the employer adds the total taxable value of all BIKs to the employee’s annual income. For instance, consider an employee who earns £40,000 per year and receives BIKs from the company worth £5,000. After adding the BIKs’ total value to their annual income, their total taxable income becomes £45,000.

Now, if they fall under the 20% income tax bracket, they will be liable to pay £1,000 extra in tax since 20% of £5,000 is £1,000.

Employer Must Pay Class 1A NICs

As mentioned above, just like an employee’s BIKs are subject to income tax and NICs, an employer also attracts Class 1A National Insurance contributions on a benefit they give to your employees by reason of their employment. Employers must pay 13.8% NICs on the total value of benefits. If total BIKs provided are £10,000, the employer owes £1,380 in NICs. Now, according to HMRC, the rate for employers to pay Class 1A NIC on expenses and benefits from 6 April 2024 to 5 April 2025 is 13.8%.

Thus, the rate of 13.8 is applied to the taxable value of the benefit in kind. Nevertheless, it is significant to highlight that the benefits in kind are, in fact, a tax-efficient way for employers to reward their employees rather than apart from distributing the regular salary among them. How so? Fortunately, the cost of BIKs provided to employees is an allowable expense, which means it is tax-deductible and can be subtracted from the taxable profits when fulfilling the corporation tax obligations. Hence, you can consider that BIKs are, in truth, an advantageous way to acknowledge your employees as well as reduce your corporation tax liabilities.

Moving further, the deadline to submit Class 1A National Insurance contributions on benefits is 22 July each year for the previous tax year. and it is 19 July if you are paying it via post. Similarly, in most cases, while an employee necessarily has to pay income tax on the given benefits in kind, they will not always have to pay NI on them. Consequently, it is a tax-saving way for them. However, to ensure that you are exempt from paying NI on your BIKs, it is essential that your employer administers the benefit in a way where you do not receive it in the form of cash or equivalent, like vouchers, since HMRC will deem it as earnings which are subject to both income tax and employee NI.

Report Benefits In Kind To HMRC

There are different ways employers can report BIKs:

P11D Form

• Employers can report the benefits given to the employees via the P11d form that needs to be submitted to HMRC by 6 July for the current tax year.
• You can delve into reading more about a p11d form by reading our guide: What is a p11d form, and why is it important for tax purposes?

Payrolling Benefits In Kind

• Next, employers primarily opt to process and report the tax on benefits in kind through payroll, wherein they deduct the tax in real-time.
• Want to know more about how to payroll the benefits in kind?
• Skim through our guide: Payroll the benefits in kind: Everything you need to know.

P11d(B) Form

• If the employer does not pay expenses and benefits through payroll, they must submit an online  form to HMRC at the end of the tax year to pay any Class 1A National Insurance due. This form is called a P11D(b), which is used to report Class 1A NICs due.

 

 

Conclusion

All in all, grasping the nettle of how to calculate tax on benefits in kind is essential for both employees and employers to ensure compliance with HMRC regulations.b by working out how much tax you need to pay on the BIKs your company is providing to the employees, you can manage tax liabilities efficiently while also maximizing the benefits offered to employees. Alternatively, if undertaking the tax obligations is not your cup of tea, an accountant can prove to be your business-saver here. To top it all off, the certified payroll accountants at payrollservices.accountants can save you from the nightmare of dealing with the complex tax obligations accompanying the benefits in kind when your business is extensive.

By outsourcing your company payroll from our team of skilled and expert accountants, you can have your tax obligations fulfilled in perfect sync with HMRC directives. Further down the line, we offer a wide range of customised payroll services, including full payroll outsourcing, partial payroll outsourcing, and payroll consulting in the UK. Therefore, let our experts deal with all your business tax liabilities, including the payrolling of benefits in kind or calculation of tax on BIKs.

Disclaimer: Please note that the information provided in this blog is exclusively for informational purposes and should not be considered financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.