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Employment Benefits/Benefit in Kind Tax Under Employment Income and Doing Self-Assessment

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Employment Benefits/Benefit in Kind Tax Under Employment Income and Doing Self-Assessment

Understanding Benefit in Kind (BIK)

A Benefit in Kind (BIK) is a non-cash benefit provided by an employer to an employee, which has a monetary value and is subject to taxation. These benefits can range from company cars to private healthcare and accommodation, all of which must be reported for tax purposes under employment income self-assessment.

Employers are required to report taxable benefits in kind to HMRC, and employees may need to pay additional tax on them. Understanding these benefits can help optimize tax planning and reduce liabilities where possible.

Types of Benefit in Kind & Tax Treatment

1. Company Cars and Fuel

One of the most common taxable benefits, company cars are taxed based on:

  • The list price of the car when new

  • CO2 emissions (higher emissions attract higher tax rates)

  • Fuel type (diesel cars may have an additional supplement, while electric vehicles have lower tax rates)

Example:

  • Mark is given a company car with a list price of £30,000 and CO2 emissions of 110g/km.

  • The Benefit in Kind percentage is 25%, making the taxable benefit £7,500.

  • If Mark is a 20% taxpayer, he owes £1,500 in additional tax.

Electric company cars generally have a much lower BIK percentage, offering significant tax savings.

2. Private Fuel Benefit

If an employer provides free or subsidized fuel for personal use in a company car, this is considered a taxable benefit and is calculated separately based on the car’s CO2 emissions.

3. Use and Gift Benefits

If an employee is given personal use of company assets (e.g., laptops, property, or gym memberships), the cash equivalent of this use is taxable. If the asset is later gifted, the market value at the time of transfer is taxable.

4. Home Usage Benefits

Employers providing home-use allowances such as internet, utilities, or rent subsidies may be required to report these as taxable benefits.

5. Interest-Free Loans

If an employer provides an interest-free or low-interest loan above £10,000, it is considered a taxable benefit.

6. Living Accommodation Provided by Employer

If an employer provides free or subsidized accommodation, the taxable benefit is calculated based on:

  • Annual rental value of the property

  • Cost of additional services (e.g., utilities, maintenance)

7. Authorised Mileage Allowance

If an employer reimburses an employee for mileage at a rate lower than the approved HMRC mileage rates, the employee can claim the difference as a tax deduction.

HMRC Approved Mileage Rates:

  • Cars & Vans: 45p per mile for the first 10,000 miles, 25p thereafter

  • Motorcycles: 24p per mile

  • Bicycles: 20p per mile

8. Employer-Provided Meals

Meals provided on-site in a staff canteen are exempt from tax, but meal vouchers are taxable benefits.

9. Shares and Share Options

If employees receive company shares at a discount or for free, they may be subject to Income Tax and National Insurance contributions.

Tax-Saving Tips on Benefit in Kind

  1. Opt for Tax-Efficient Benefits – Employees should prioritize benefits that have minimal tax implications, such as pension contributions, cycle-to-work schemes, and tax-free childcare vouchers.

  2. Negotiate Salary Sacrifice Arrangements – Reducing your gross salary in exchange for non-taxable benefits (e.g., workplace pensions) can lower your overall taxable income.

  3. Use Low-Emission or Electric Company Cars – Opting for an electric or hybrid company car can significantly reduce Benefit in Kind tax rates.

  4. Claim Business-Related Expenses – Ensuring work-related benefits (e.g., travel and mobile phone usage) are correctly classified as business expenses can prevent unnecessary taxation.

  5. Verify Your Tax Code – Incorrect tax codes due to unreported benefits can lead to unexpected tax liabilities. Employees should regularly check their PAYE tax codes to ensure accuracy.

  6. Plan with a Tax Adviser – Professional tax advisers can provide strategic tax planning to legally reduce taxable benefits and identify allowable deductions.

Why Employees Should Do Self-Assessment

Even if an employee is paid through PAYE (Pay As You Earn), they may still need to complete a Self-Assessment Tax Return. Many employees mistakenly assume that their tax affairs are fully handled through payroll, but there are key reasons why self-assessment is necessary:

  • Reporting Benefits in Kind Accurately – PAYE does not always account for taxable benefits in kind, requiring self-assessment to declare them properly.

  • Higher Earners May Have Additional Tax Liabilities – If an employee earns over £100,000, their personal allowance reduces, and self-assessment helps ensure the correct tax amount is paid.

  • Multiple Income Sources – Employees with rental income, freelance earnings, or dividend income need to complete self-assessment to declare all income.

  • Claiming Work-Related Expenses – Employees can use self-assessment to claim tax relief on allowable expenses such as mileage, home office costs, and work-related subscriptions.

  • Ensuring Correct Tax Code Adjustments – Self-assessment helps verify that tax codes reflect all deductions and benefits correctly, avoiding underpayment or overpayment of tax.

Completing self-assessment allows employees to take control of their tax affairs, avoid penalties, and make sure they are not overpaying tax due to unclaimed deductions.

Employees receiving Benefits in Kind should complete a Self-Assessment Tax Return to ensure they:

  • Accurately report taxable benefits – HMRC requires transparency in benefit reporting.

  • Avoid penalties – Failure to declare taxable benefits may result in fines and interest on unpaid tax.

  • Claim eligible deductions – Self-assessment allows employees to claim deductions on expenses that may offset taxable benefits.

  • Manage cash flow effectively – Knowing tax liabilities in advance helps with financial planning and avoids unexpected tax bills.

How Tax Advisers Can Help

Navigating the complexities of Benefit in Kind taxation requires expert knowledge. Acumen Accountants and Tax Advisers can assist in:

  • Accurate tax reporting – Ensuring benefits are correctly declared and mitigating compliance risks.

  • Optimizing tax efficiency – Identifying legal tax-saving opportunities based on individual employment circumstances.

  • Planning for the future – Structuring benefits and income efficiently to minimize tax liability over time.

For further information and expert assistance, contact Acumen Accountants and Tax Advisers. Our team can help identify all possible ways to reduce tax bills.

Contact Us:
📞 07534473220
🌐 www.acumenagc.com
✉ info@acumenagc.com
🏢 37th Floor, 1 Canada Square, London E14 5DY
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Disclaimer: The information provided in this article is for general guidance only and does not constitute professional tax advice. Tax laws are subject to change, and individual circumstances may vary. It is recommended to consult a qualified tax professional or accountant for personalized advice.