Why is this important?
Tax on benefits in kind
Table of contents
What are benefits in kind
Benefits in kind are benefits which employees or directors receive from their employment but which are not included in their salary cheque or wages. They are sometimes called ‘perks’ or ‘fringe benefits’. They include things like company cars, private medical insurance paid for by the employer and cheap or free loans. Some benefits in kind will not be taxed. Some benefits in kind will be taxed only for people who are not in lower paid employment. Some benefits in kind will be taxed for everyone, whatever their income.
Some benefits in kind are tax-free and should not be entered on your tax return if you get one. These include:
- contributions paid by your employer into an approved occupational or personal pension scheme for you as an employee. Nearly all schemes are included
- cheap or free canteen meals, if these are provided for all employees, even if separate facilities are provided for different groups of employees
- in-house sports facilities
- counselling services to redundant employees
- certain childcare arrangements
- works buses, or subsidies to public bus services, to get employees to and from work
- bicycles and cycling safety equipment provided for employees to get to and from work and workplace parking for bicycles and motorcycles
- reasonable removal expenses if you have to move to take up a new job or are transferred by your employer, up to a maximum of £8,000 for each move
- genuine personal gifts given for reasons unconnected with the job, for example, retirement gifts other than cash, or wedding gifts
- gifts, other than cash, that you receive from someone other than your employer, for example, seats at sporting or cultural events, providing that any gift or outing is not worth more than £250 in a single year
- if you are disabled, equipment and facilities provided for you to carry out your job. For more information, go to the Low Incomes Tax Reform Group’s website at: www.litrg.org.uk.
Where benefits in kind are taxable, tax is paid on the taxable value of the benefit. HM Revenue and Customs defines this as the cash equivalent value. This is usually the amount it costs your employer to provide you with the benefit. There are some exceptions to this, where there are special rules for calculating the taxable value of the benefit in kind. An example is company cars which have special rules.
If you earn less than £8,500 gross a year working for a single employer or for associated employers, this counts as lower-paid employment, even if you work for only part of the tax year. Gross pay means your wages before any deductions. The value of any of the benefits received must be included in the £8,500. So your salary may be lower than this amount, but the value of the benefits in kind could mean that you do not count as lower-paid. Company directors cannot normally count as lower-paid, however much they earn.
If you complete a tax return and you get taxable benefits in kind, you must enter the value of them on the Employment page of your tax return for the relevant year. For more information about how to declare benefits in kind for tax purposes, see under heading How tax is declared and paid on benefits in kind. The following paragraphs list some of the more common benefits in kind.
Generally, if you’re provided with accommodation either rent-free or for a rent which is below market rent, the difference between the rent you pay, if any, and the annual value of the property is taxable.
Below market rent means below what you would normally expect to pay to rent a similar property.
Annual value is usually taken to be the same as gross rateable value. It does not matter whether you are lower-paid or not – the benefit is taxable.
An extra charge will be made if the accommodation cost more than £75,000 when it was bought by the employer.
There are three exceptions to this rule. No tax will have to be paid on the accommodation if:
- it is necessary for you to live in the accommodation to perform your duties properly, for example, if you are a school caretaker, or
- it is provided so that you can perform your duties better than you could without it and it is customary in that type of employment to have accommodation provided, for example, if you are a police officer, or
- the job involves a special security risk and special accommodation is provided for your safety, for example, if you are in the armed forces.
Moving because of your job
If you have to move because of your job, you may be entitled to relocation expenses.
Lighting or heating
Additional benefits, for example, heating or lighting provided with the accommodation are usually taxable for employees in lower-paid employment even if one of the three exceptions applies. However, they are not taxable if the amount you get for them does not exceed 10 per cent of your net earnings.
Council tax/rates, water and sewerage charges
Where your employer pays your council tax (rates in Northern Ireland), water or sewerage charges, you will have to pay tax on them. But you will not have to pay tax if one of the three exceptions applies.
Hotels and temporary accommodation
The cost of hotels and temporary accommodation while travelling for business purposes is not taxed. However, if you are given an overall cash allowance to cover these costs, this will be taxed, but anything you spend on accommodation for the purpose of your job can be deducted from your taxable income, as a tax relief.
For more information about tax on accommodation as a benefit in kind, including example calculations, see the GOV.UK website at: www.gov.uk.
Cars and vans
Tax is payable on a company car if it is available for private use by an employee, company director or their family or household. In nearly all cases, private use includes journeys between home and work. The tax charge is lower for cheaper cars, cars with lower C02 emissions and cars that can run on alternative fuels. There is no tax charge if the car is powered only by electricity.
Cars are also not taxable if:
- they are provided only for business, and
- they are not available for private use, and
- they are not actually used privately.
If you use your employer’s van privately, this can also be taxable. However, if all you do is take the van home with you overnight and do not use it for any other significant private purpose, no tax will be due.
If you pay childcare costs yourself, you cannot claim these costs as relief against tax. Neither can you claim travel expenses to and from work for childcare reasons.
If your employer provides a nursery at your place of work, usually this will be completely free of tax and National Insurance Contributions (NICS).
From 6 April 2011, if you start to get childcare vouchers from your employer under the Employer Supported Childcare Vouchers scheme, some of the payment you'll receive is tax free. How much you get tax free depends on what rate of tax you pay. The limits are:
- Basic rate taxpayer £55 per week
- Higher rate taxpayer £28 per week
- Additional rate tax payer £25 per week.
These limits only apply if you are getting vouchers from your employer for childcare. They do not apply if you are getting a benefit in cash.
If you get more than the weekly tax free limit in vouchers you will have to pay tax and NICs on any amount above this.
If you are already in the scheme, these changes won't affect you. You'll only have to pay tax and NICs on amounts over £55 per week, regardless of the rate of tax you pay.
Accepting childcare vouchers from your employer will usually mean a cut in cash pay. This could reduce your salary to a sum below the lower earnings limit for NICS, and may affect your right to certain benefits.
Accepting childcare vouchers can affect how much tax credit you can claim. The working tax credits system provides support for childcare costs but where costs are covered by vouchers, they cannot be included as part of your claim. GOV.UK provide a calculator tool which aims to help you decide whether you are better off taking the vouchers or not. Use this tool with caution if your income goes up or down, as most tax credits are based on the income for the year before, while tax and national insurance are based on the current tax year. You can find the calculator on the website of GOV.UK at: www.gov.uk.
For more information about the lower earnings limit and how your rights to certain benefits are affected if your salary falls below the lower earnings limit, see National insurance – contributions and benefits.
Work and safety clothes provided by your employer, for example, overalls and protective helmets or shoes, are not liable to tax. However, any normal clothing provided by your employer is taxable.
Credit cards and charge cards
If you use a credit card to buy goods or services on your employer’s account, you will have to pay tax on the cost to the employer of providing these goods or services. You may be able to claim a deduction for goods or services purchased 'wholly, exclusively and necessarily' for the purpose of your job.
Fuel paid for by an employer or provided by your employer for personal use is taxable unless you are a lower-paid employee.
If you are not a lower-paid employee and you receive a free holiday, you will have to pay tax on its value. Lower-paid employees do not have to pay tax on a free holiday as long as the holiday has no resale value and is not convertible to cash, for example, if payment is made direct to a hotel. A payment to a travel agent for a holiday abroad would be taxable.
Job-related benefits are benefits to employees provided from within the employer’s business. They include cheap airline seats for airline staff, cheap rail travel for railway employees and goods or services provided by a business which are offered free or at a discounted price to employees. They are taxable unless you are a lower-paid employee.
They do not include company cars and fuel, loans, accommodation or mobile phones, as there are special rules for these items.
Cash allowances given in lieu of job-related benefits are taxable for all employees. Payments to miners in lieu of coal, however, are not taxable.
Interest-free and cheap loans are taxable for everyone except lower-paid employees.
Meals provided in a staff canteen which is available to all staff are not taxable and you do not need to list them on your tax return.
In addition, if you get free or subsidised meals at work, and the meals are available to all employees, they will also not be taxable and do not need to be listed on your tax return. This extends to tickets or vouchers given by employers for free and subsidised meals where the meals are not provided by the employer as long as they are provided at your place of work.
If the employer gives other meal or luncheon vouchers to use away from your place of work, see under heading Vouchers.
If your employer provides private medical insurance, this is taxable for everyone except for lower-paid employees.
If you get a mileage allowance for using your own car, van, motorbike or bicycle for work journeys, these payments are not taxable as long as they are within limits set by the Government. The limits are called approved mileage rates. Information about current approved mileage rates can be found on the website of GOV.UK at: www.gov.uk.
Tax-free mileage allowances apply only to work journeys, that is, journeys you have to make in the course of doing your job. Work journeys include, for example, delivering goods or making calls to customers. They do not include journeys to and from your normal workplace.
You can find more information about using your own vehicle for work on the GOV.UK website at www.gov.uk.
If you stay away from home overnight on business and you spend money on personal expenses, for example, newspapers, private telephone calls or laundry, you can have a limited amount of these expenses paid back by your employer without the payment being taxable. The limit is £5 a night for stays in the UK or £10 a night for stays everywhere else.
If your employer pays your removal expenses up to £8,000, this is tax-free. This limit applies per move. You can find more details on the GOV.UK website at: www.gov.uk.
Generally, the value of shares transferred to an employee or director at a discount is liable to tax. There are, however, a number of schemes which can give tax and National Insurance Contribution advantages if you obtain shares (usually in the company you work for) at a discount or for free.
If you need further advice on how shares are treated for tax purposes, consult a specialist adviser, or see Help with tax problems.
If your employer pays for a training course relating to your job, the value of the payment made by your employer is not taxable. This exemption includes extra costs such as travelling to and from the course and any costs in connection with an assessment of the training – for example, the cost of sitting an exam.
If your employer pays for your training course in order to retrain you for another job, the value of the payment made by the employer is not taxable.
For more details, see Tax reliefs.
If your employer reimburses you for the costs of travelling to and from work or pays these direct, for example, by buying a season ticket for you, the value of this benefit is generally taxable. However, you can claim tax relief on any travelling expenses paid by your employer to cover the cost of journeys made by you as a necessary part of your job, excluding journeys to and from work. For tax treatment of mileage allowances, see under heading Mileage allowances.
If you get vouchers, including cheque vouchers which are exchangeable for goods and services, you will be taxed on the cost to your employer of providing the voucher and these goods and services. Childcare vouchers are an exception. Cash vouchers, such as Holiday Stamp schemes used in the building industry, are subject to tax in all cases. If the voucher can be exchanged for cash, the tax will generally be paid through PAYE, that is, it will be deducted from your pay, as if it were a payment of cash.
If you get any taxable benefits in kind, and you complete a tax return, you must enter their value on the Employment page of your tax return for the relevant year, even if tax has already been paid on them under PAYE. Your employer also has to make a return to HM Revenue and Customs (HMRC) with details of any benefits in kind given to you. Your employer makes the return on the form P11D, which lists the benefits and expenses for the relevant tax year. You should get a copy this form by 6 July following the end of the tax year.
If you are a lower-paid employee, your employer should give you form P9D, or the same information, showing you any benefits in kind you receive.
Benefits in kind may be taxed under PAYE by being offset against personal tax allowances in your PAYE code. You should always check your PAYE Coding Notice and tell HMRC if you do not understand it or if you think you are not paying the right amount of tax.
If the benefits in kind are not included in your tax code for the year when you receive them, the tax on them may be collected after the end of the tax year. If you do not complete a Self Assessment tax return, you may receive a form P800 telling you about an underpayment or overpayment of tax
For more information about PAYE, see The Pay As You Earn (PAYE) system.
For more information about underpayments of tax under PAYE, see Pay As You Earn: common problems.