Benefits in kind (BIK) are non-cash benefits that an employer provides to an employee in addition to their salary. Common examples include company cars, private medical insurance, interest-free loans and gym memberships. In the UK, most benefits in kind are treated as taxable income for the employee and give rise to a Class 1A National Insurance liability for the employer.
The rules are set out in the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and administered by HMRC.
What Counts as a Benefit in Kind?
Any non-cash benefit provided to an employee by reason of their employment is potentially a BIK. The most common types include:
| Benefit | How it is valued |
|---|---|
| Company car | Based on the car’s list price and CO2 emissions (see company car tax) |
| Private fuel for personal use | Fixed fuel benefit charge multiplied by the car’s BIK percentage |
| Private medical insurance | Cost to the employer of providing the cover |
| Interest-free or low-interest loans | The difference between interest charged and HMRC’s official rate of interest, which HM Treasury sets and can review during the year |
| Accommodation | Annual value of the property, plus additional charge if the property cost exceeds £75,000 |
| Relocation expenses | Amounts exceeding the £8,000 exemption |
| Gym membership | Cost to the employer |
| School fees | Cost to the employer |
| Non-business travel | Cost to the employer |
Exempt Benefits
Not all benefits are taxable. The following are specifically exempt:
| Exemption | Conditions |
|---|---|
| Pension contributions | Employer contributions to a registered pension scheme |
| Death-in-service insurance | Premiums paid by the employer |
| Trivial benefits | Cost to the employer does not exceed £50 per occasion and is not cash or a cash voucher |
| Cycle to work scheme | Equipment provided under a qualifying salary sacrifice arrangement |
| Workplace nursery | Childcare provided at the workplace (or premises secured by the employer) |
| Mobile phone | One mobile phone per employee for business and personal use |
| Annual staff parties | Total cost does not exceed £150 per head per tax year |
| Eye tests | For employees who use VDUs |
| Long-service awards | Not within first 20 years; maximum £50 per year of service |
| Employer-provided meals | Canteen available to all staff on a reasonable basis |
Reporting Benefits: The P11D
Benefits in kind are reported to HMRC on form P11D, which must be filed for each employee who received a benefit during the tax year.
Key Deadlines
| Deadline | Requirement |
|---|---|
| 6 July following the tax year | File P11D and P11D(b) with HMRC |
| 6 July following the tax year | Give a copy of the P11D to the employee |
| 22 July (19 July if paying by post) | Pay Class 1A NIC to HMRC |
P11D(b)
The P11D(b) is a return of the total Class 1A NIC due on all benefits provided to all employees. It accompanies the individual P11D forms.
Payrolling Benefits
Since April 2016, employers can choose to payroll benefits in kind. This means the taxable value of the benefit is added to the employee’s pay each period and taxed through PAYE in real time, eliminating the need to file P11D forms for those benefits.
| Feature | P11D reporting | Payrolling |
|---|---|---|
| When tax is collected | Through the employee’s tax code in the following year | Through PAYE each pay period |
| Employer filing | P11D required by 6 July | No P11D needed for payrolled benefits |
| Employee experience | Tax code adjustment the following year | Tax deducted in real time |
| Registration | Not required | Must register with HMRC before the start of the tax year |
Employers must still report and pay Class 1A NIC regardless of whether benefits are payrolled or reported on P11D.
Class 1A National Insurance
The employer pays Class 1A NIC on the taxable value of most benefits in kind. The Class 1A rate follows the main employer rate of Class 1 National Insurance, which the government sets for each tax year. The employee does not pay NIC on benefits (unless they are payrolled through salary sacrifice, in which case different rules may apply).
Calculation Example
An employer provides private medical insurance costing £1,200 per year. With an illustrative Class 1A rate of 15%:
| Element | Amount (£) |
|---|---|
| Taxable benefit value | 1,200 |
| Class 1A NIC at 15% | 180 |
The employee is taxed on £1,200 through their tax code (or payroll), and the employer pays £180 in Class 1A NIC.
Common Benefits in Detail
Company Cars
The company car tax charge is calculated as:
BIK value = List price x BIK percentage (based on CO2 emissions)
The BIK percentage rises with the car’s CO2 emissions. Pure electric cars sit in the lowest band, cars emitting 1-50 g/km are banded by their electric-only range, and the percentage then climbs in steps up to a maximum for the most polluting cars. Diesel cars that do not meet the RDE2 standard pay a supplement. The government sets the percentages several tax years in advance, and HMRC publishes the current table on GOV.UK.
As an illustration, a car with a list price of £35,000 and a BIK rate of 28% generates a benefit of £9,800. A higher-rate taxpayer (40%) would pay £3,920 in tax.
Interest-Free Loans
If an employer lends an employee more than £10,000 at less than the official rate of interest, the difference is a taxable benefit.
BIK value = Loan balance x (Official rate - Interest charged)
Loans of £10,000 or less throughout the entire tax year are exempt.
Accommodation
Where an employer provides living accommodation to an employee, the basic BIK is the annual value of the property (broadly equivalent to the rateable value). If the property cost more than £75,000, an additional charge applies:
Additional charge = (Cost - £75,000) x Official rate of interest
Accommodation that is necessary for the proper performance of the employee’s duties (such as a caretaker’s flat) is exempt.
Salary Sacrifice
Under a salary sacrifice arrangement, an employee gives up part of their cash salary in return for a benefit. The tax treatment depends on the benefit:
| Benefit | Salary sacrifice treatment |
|---|---|
| Pension contributions | Tax and NIC efficient for both employer and employee |
| Cycle to work | Tax and NIC efficient |
| Workplace nursery | Tax and NIC efficient |
| Ultra-low-emission car (0-75 g/km CO2) | Can be beneficial due to low BIK rates |
| Most other benefits | Taxed on the higher of the salary sacrificed or the BIK value |
Since April 2017, the optional remuneration arrangements (OpRA) rules mean that most salary sacrifice arrangements are taxed on the greater of the amount of salary given up or the taxable value of the benefit. The exceptions (pensions, cycle to work, nursery, ultra-low-emission vehicles) retain their tax advantages.
Employee Benefits and Deductions
Employee benefits that are exempt from tax and NIC represent genuine savings for both employer and employee. When designing a benefits package, employers should prioritise:
- Benefits that are specifically exempt from income tax and NIC
- Benefits where the employer can obtain a corporation tax deduction for the cost
- Salary sacrifice arrangements for pensions and the limited categories where the OpRA rules do not apply
Record Keeping
Employers must maintain records of all benefits provided to employees, including:
- The cost of each benefit to the employer
- The cash equivalent value for tax purposes
- Which employees received which benefits and for what period
- Any amounts made good (reimbursed) by the employee, which reduce the taxable value
Records must be kept for at least three years after the end of the tax year to which they relate, though six years is advisable in case of an HMRC enquiry.