What are the true benefits of providing perks beyond pay? In the modern workplace, where companies compete for top talent and seek to keep employees motivated, Benefits in Kind (BIK) plays an increasingly vital role.
Far from being mere extras, BIKs—ranging from health insurance to company cars—offer advantages that can make a real difference in employees’ lives. However, with these perks comes a set of tax and compliance responsibilities that UK businesses must navigate carefully.
This guide explains how Benefits in Kind work, which benefits are taxable, and how to manage them effectively to maintain compliance with HMRC regulations while enhancing your employee value proposition.
Benefits in Kind (BIK) are non-cash perks provided by employers that carry real monetary value and are often considered part of an employee’s taxable income. These benefits, sometimes known as “fringe benefits,” can include private health insurance, gym memberships, or company cars—elements that serve as incentives, fostering employee satisfaction and helping businesses retain and attract talent.
Despite not being direct cash payments, BIKs are typically considered a part of one’s overall compensation package, meaning they can be subject to income tax and National Insurance Contributions (NIC) if they meet specific criteria.
Offering Benefits in Kind is more than a competitive strategy; it’s a way for employers to show commitment to their employees’ well-being, professional growth, and financial security. In recent years, as businesses strive to enhance their workplace culture, BIKs have proven effective in improving job satisfaction and reducing turnover.
Today, companies provide BIKs not just to incentivise employees but to create a supportive environment that addresses their needs beyond a paycheque.
For example, a company car or the Cycle to Work scheme may alleviate commuting stress, while private medical insurance can offer peace of mind regarding health concerns.
This approach can result in a more engaged and loyal workforce, helping businesses stand out as employers of choice. Additionally, these perks reflect positively on a company’s brand, attracting new hires by demonstrating an investment in employee well-being and development.
The range of BIKs available to employees is broad, and each type comes with its own set of tax implications. Here are some common BIK examples that many UK companies offer:
In the UK, calculating BIK tax depends on the specific type of benefit and its monetary value. Generally, BIK tax is calculated using the “cash equivalent” value of the benefit, which can be complex given the various rules for different perks.
For instance, to calculate the BIK tax on a company car, employers must consider factors such as the car’s CO₂ emissions, the P11D value (list price including VAT), and the employee’s tax bracket.
For company cars, the tax rate is often influenced by the environmental impact of the vehicle, with lower rates available for electric or low-emission cars. A petrol or diesel car could have a tax rate of up to 37%, while electric cars might only incur a 2% BIK charge.
To estimate the total tax, employers multiply the car’s P11D value by the BIK percentage band based on emissions and then by the employee’s income tax rate.
When it comes to reporting Benefits in Kind, employers in the UK must adhere to strict guidelines to stay compliant with HMRC regulations. Reporting requirements are particularly important since Benefits in Kind effectively increase an employee’s taxable income, impacting their total income tax and National Insurance Contributions (NIC).
This level of reporting ensures that employees are taxed appropriately on BIKs, and it simplifies record-keeping for employers, offering greater transparency. Using payroll software that handles BIKs can streamline the process, helping businesses stay compliant without the need for extensive paperwork.
Not all Benefits in Kind are taxable. Certain perks are exempt from BIK tax, either due to their purpose or specific criteria set by HMRC. Here are some of the main types of tax-free BIKs:
Commuting and Workplace Transport:
Expenses covering work-related travel, such as a shuttle service between home and work, are typically exempt from tax. This exemption also applies to bicycles provided under the Cycle to Work scheme, where employees can lease bikes for work journeys.
Uniforms and Safety Gear:
If an employer provides necessary work attire like uniforms, protective clothing, or safety equipment, these items are usually tax-free, as they are considered essential for job performance.
Staff Canteen Meals:
Meals offered in a staff canteen are tax-free, provided they are available to all employees, and the meal costs are ‘reasonable’ by HMRC standards. This perk supports workplace wellbeing and is especially appreciated by employees on-site during work hours.
Mobile Phones:
Mobile phones provided by the employer are tax-free if they are used solely for work purposes. However, if employees use the phone for personal calls, the benefit could become taxable depending on usage levels.
Work-Related Training:
Training or courses directly related to an employee’s role are also tax-exempt, reflecting the value placed on professional development by HMRC. This allows companies to invest in their workforce without incurring additional tax liabilities.
Tax-free BIKs provide a significant advantage to both employers and employees by reducing overall tax liabilities while still enhancing employee satisfaction. However, it’s crucial to ensure that these benefits meet HMRC’s criteria for tax exemption.
For many companies, offering a company car is a standard BIK, but it’s one that often requires careful tax calculation. Here’s an example to clarify the calculation process for company car tax:
Employers must also pay Class 1A NIC on the taxable value of this benefit, calculated at 13.8% in the UK. Using payroll software that integrates BIK calculations is highly beneficial here, as it reduces manual errors and simplifies tax compliance.
Navigating the tax and reporting requirements for BIKs can be challenging, especially for organisations with diverse benefit packages. Here are some essential compliance tips:
Provide Detailed Information to New Hires: Ensure each employee understands their BIK entitlements, tax liabilities, and how BIKs will affect their take-home pay. Include these details in employment contracts to avoid misunderstandings.
Maintain Clear Records: Keep receipts, expense forms, and records of all benefits provided. Good record-keeping supports accurate P11D filings and is crucial in case of HMRC audits.
Use Payroll Software for Payrolling BIKs: By 2026, all companies will be required to use payrolling for BIKs. Setting up this system now can save time, reduce paperwork, and allow for monthly deductions, making tax implications clearer to employees.
Stay Informed on HMRC Updates: HMRC guidelines for BIKs can change, as shown by the upcoming payrolling requirements. Regularly reviewing HMRC’s A to Z expenses and benefits guide ensures your business remains compliant.
Benefits in Kind are a powerful tool for enhancing employee satisfaction and building a supportive workplace culture, but they also require careful handling from a tax and compliance perspective. By understanding which BIKs are taxable, how to report them, and ensuring compliance with HMRC regulations, employers can maximise the value of these perks while avoiding potential liabilities.
As the tax landscape evolves, especially with the upcoming mandatory payrolling of BIKs, staying informed and proactive is key. Embrace the value of Benefits in Kind, and ensure they work to your company’s advantage by keeping compliance in focus every step of the way.
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