What are Benefits in Kind, and how are they taxed?

If you receive any services or benefits from your contractor company, in addition to your salary, they may be classified as ‘benefits in kind’ – and taxable. Here, we look at how such items may be taxed, and some of the common errors made by contractors when it comes to reporting these benefits.

Benefits in kind are sometimes referred to as ‘perks’ of the job and may include things like private medical insurance, business entertainment, gym memberships, and company cars.

They are taxed at your highest rate of tax; either 20%, 40% or 45%. Your employer (i.e. your own company, if you’re a contractor) will also have to pay 13.8% Employers National Insurance on the value of each benefit.

We asked Michael Senior ACA, Director of Quantic UK, to explain more:

How do you let HMRC know if you’ve received any benefits in kind?

The company will need to report to HMRC if it provides any benefits in kind to an employee or a director using a form called a P11D.

The company must complete a P11D for each employee or director and, together with a summary for all employees on a Form P11D(b).

Benefits in kind include items such as reimbursed expenses, car and fuel benefits, entertaining and also any directors’ beneficial loans

The key date to file the forms P11D and P11D(b) is 3 months after the end of the tax year, i.e. 6 July.

I can get a good deal for healthcare if I pay via my company, will this be taxed as a BiK?

Healthcare paid for by your contractor company is a taxable benefit in kind and is subject to Income Tax and Employers’ Class 1A National Insurance.

However, the advantage to the director is that it is not subject to Employees’ NICs, unlike a salary.  So, by using your company you pay for your healthcare, you save on the Employees’ NICs you would have paid if you had taken a salary to pay for the healthcare costs privately.

Also, healthcare providers usually have more competitive rates when providing cover to companies compared to individual rates. Find out more about private health insurance here.

What are the most common errors made by contractors when it comes to dealing with benefits in kind?

Contractors often forget to tell their accountant if they have used their company to pay for certain expenses that need to be reported on the P11D form.

Common omissions include:

• Reimbursed expenses : contractors may think some expenses don’t need to be declared.  The company reports the expenses on the P11D and then provided the expense has been incurred “wholly and exclusively” for business purposes and within other HMRC guidelines, the contractors claims a deduction on the Tax Return.
• Company Cars : contractors may report incorrect dates and CO2 details on the company cars.
• Beneficial loan interest : contractors are often unaware that they may have an overdrawn Directors loan account.  This gives rise to a benefit in kind if the overdrawn balance is greater than £10,000. You can read a very concise guide to the taxation of directors’ loans via the Gov.UK site (as the rules are fairly complex).

P11D submissions must be made online from 6th April 2023 onwards

It is worth noting that all P11D information must be submitted online for the 2022-23 tax year onwards, i.e. for submissions made on or after 6th April 2023. You can read more in HMRC’s February 2023 Employer Bulletin.