Benefits in Kind
Navigating the intricate landscape of self-employment is no easy feat, especially for contractors. Amidst the myriad of regulations, one term stands out prominently: Limited Companies. But what are benefits in kind?
As a director and employee of your limited company, you pay tax on company benefits like cars, bikes, and childcare. The amount you pay depends on the benefit you get; some can be tax-free, while others incur tax and National Insurance.
In this comprehensive guide, we delve deep into the heart of limited companies. Whether you’re an aspiring contractor or a seasoned veteran seeking clarity, this guide aims to empower you with the knowledge to make informed decisions.
What is a Benefit In Kind?
A benefit in kind is any non-cash benefit of monetary value provided by a company to an employee that isn’t ‘wholly and exclusively’ for the purposes of the business. They are often called ‘perks’, ‘fringe benefits’ or ‘notional pay’.
For example, if a travelling sales rep or delivery driver were provided with a vehicle to help them perform their duties, HMRC would consider the vehicle essential to their work and, therefore, not a benefit in kind.
If the same vehicle were provided to an employee who does not need to travel, it would not be seen as entirely necessary for work, so it would be considered a benefit in kind.
Companies use benefits in kind to reward employees over and above paying their wages and bonuses. The rewards have a monetary value attached, so they are treated as taxable income.
Examples of a Benefit In Kind
Given the broad definition of benefit in kind, it is impossible for HMRC to maintain a complete list, although they do provide an overview of some of the more common examples. These include:
- Private health insurance
- A company car
- Assets (such as a laptop or mobile) provided to an employee that have significant personal use
- Interest free or cheap loans where the amount is over £10,000
- Clothing
- Living accomodation
- Holidays or holiday vouchers
Given the limited number of benefits that are non-taxable, HMRC maintain a more complete list. The more common non-taxable benefits you’ll likely encounter are:
- Meal vouchers or subsidised canteen meals provided to all employees
- In-house facilities such as a gym or childcare services
- Equipment provided as part of the Cycle to Work scheme
- On site car parking
- Long service awards
- Employee pension contributions
Are Benefits In Kind Taxable?
Although there are many different types of benefits in kind, they all fall into two categories: (i) taxable and (ii) tax-free.
Most benefits in kind are taxable to prevent employees from circumventing their income tax liabilities. If they weren’t taxed, employers could reduce an employee’s salary and replace it with a tax-free benefit.
HMRC, therefore, effectively considers benefits to be cash equivalents contributing to your income. As such, they are considered taxable earnings and subject to income tax and National Insurance contributions.
How Is Tax Calculated?
There are different rules on what kind of tax must be paid, depending on the benefit and how it has been administered. In general, benefits in kind can attract income tax and both Employee and Employer National Insurance Contributions.
i) Employee
As an employee receiving a benefit in kind, you will be charged income tax on the value of the benefit, calculated at your highest income tax band rate. These are 20% for basic rate, 40% for higher rate, and 45% for additional rate. If the benefit is administered as cash or cash equivalents (such as vouchers), it will also incur Employee NI at 13.25%.
ii) Employer
Employers who provide benefits in kind will need to pay tax in the form Class 1A NI contributions, calculated as 13.8% of the benefit’s monetary value. As this is an allowable expense, it offsets corporation tax.
How Are They Reported?
Benefits in kind are reported via P11D and P11D(b) forms. P11D forms provide details of the benefits provided to an employee or director, while the P11D(b) declares the amount of Class 1A National Insurance contributions the business owes.
A separate P11D needs to be completed for each employee, while only one P11D(b) needs to be completed for the business as a whole. The employer, not the employee, files both forms, although these are the same for contractors working through their own personal services company.
P11Ds/P11D(b)s have a defined deadline of 06th July following the tax year in question, so your forms for the tax year 06th April 2023 to 05th April 2024 must be filed by 06th July 2024. They can be filed through HMRC’s PAYE Online for Employers.
Contractors and Benefits in Kind
Contractors working Inside IR35 via an umbrella company are employees of their umbrella company. While technically possible, umbrella companies do not offer additional benefits due to the costs involved. Benefits in kind are, therefore, only relevant to contractors working Outside IR35 via their own limited company.
If you are a contractor who runs your own limited company, benefits in kind are not tax-efficient as they incur both Income Tax and Employer NI Contributions. While you may save on the corporation tax, this is more than offset by the additional income tax and National Insurance payments. Therefore, paying any private costs (such as medical insurance or gym membership) out of your after-tax income is more efficient than through your limited company.
In addition to the above, contractors need to be conscious of their director’s loan account. If you withdraw money from your limited company via the director’s loan account, and the total balance of money owed is over £10,000, then the total amount will be classed as a taxable benefit in kind.