Benefits in Kind, P11D, and PAYE Settlement Agreements (PSA)
Employers often provide employees with non-cash benefits, known as benefits in kind (BIK). These can range from company cars to private medical insurance and are subject to tax and National Insurance contributions (NICs).
Benefits in Kind (BIK)
Benefits in kind are perks an employer provides that have a monetary value, but are not paid as salary. Common examples include:
- Company Cars: Vehicles provided by the employer for personal use
- Private Medical Insurance: Health insurance coverage paid for by the employer
- Accountancy fees: Personal tax returns paid by your Company fees
- Interest-Free Loans: Loans over £10,000 provided to employees without interest
These benefits are considered taxable income, meaning they must be declared to HMRC, and appropriate tax and NICs must be paid. The value of the benefit is typically calculated based on its market value. It is the gross VAT inclusive figure that is reported. If you are VAT registered VAT should not be claimed on any benefits in kind.
Benefits should be company related
A company should only pay for benefits associated with a business. It is not a way to pay for personal expenses, which should not go through the business bank account. If you need money for expenses, this should be taken as either dividends or salary.
P11D Form
The P11D form reports benefits in kind to HMRC. It must be completed for each employee who receives benefits or expenses that are not covered by an exemption. The employer is responsible for submitting the P11D forms to HMRC and providing employees with a copy. If employees complete a tax return, they must include the P11d, and the benefit will be taxed at their marginal rate. The P11d is comprised of two parts; the P11d is prepared for each employee and should be viewed as extra employment income and the P11d(b) is the summary of all the employee P11d benefits that will be subject to Class 1A NIC by the Company.
- Submission Deadline: The P11D form must be submitted to HMRC by 6th July following the end of the tax year (which ends on 5th April). Employees must also receive their copy by this date
- Penalties for Late Submission: HMRC can impose penalties on the employer if the P11D is not submitted by the deadline. These penalties start at £100 per 50 employees for each month or part month the P11D is late
- Class 1A NICs: In addition to income tax, Class 1A NICs are payable by the employer on most benefits in kind. These are calculated at 13.8% of the benefit's value and must be paid by 19 July (22nd July if online)
Example
Katie works for 'Consultancy By You Ltd' and is given a Tesla car worth £50k on 6 April 2023 to help her visit clients and she takes this home after work. It is available for her to use for the full tax year. Katie earns £45k a year and has no other income. What taxes are incurred by Katie and Consultancy By You Ltd at the end of the 5 April 2024?
a) Step 1: Calculate the Taxable Benefit
- For the 2023/24 tax year, fully electric cars have a very low BIK rate to encourage their use. The BIK rate for fully electric vehicles is 2% of the brand new list price. This can be as high as 37% for traditional cars
- Cash Equivalent Value = List Price × BIK Rate
- Cash Equivalent Value = £50,000 × 2% = £1,000
b) Step 2: Calculate Employee’s Income Tax
- Katie’s taxable benefit for the electric car is £1,000, which is added to her annual salary for tax purposes
- Total Taxable Income: £45,000 (salary) + £1,000 (BIK) = £46,000
- Since Katie is a basic rate taxpayer, her tax on the benefit will be: £1,000 × 20% = £200
- Consultancy By You Ltd must give Katie a copy of her P11d by 6 July 2024 and submit the P11D and P11d(b) to HMRC
- HMRC may collect this through a new coding notice on her salary to cover the benefit-in-kind tax, a underpayment of tax notice via a P800 after the end of the tax year, or it may be collected via self-assessment if she prepares a tax return
c) Step 3: Calculate Employer’s Class 1A NICs
- Employers must pay Class 1A NICs on the taxable benefit at a rate of 13.8%.
- Class 1A NICs = Cash Equivalent Value × 13.8%
- Class 1A NICs = £1,000 × 13.8% = £138
- Consultancy By You Ltd. must pay £138 in Class 1A NICs by 19 July 2024 for providing the electric company car to Katie
Summary of Costs
Katie is able to enjoy a £50k car for just £200, while her company is responsible for paying just £138 in Class 1A NICs.
PAYE Settlement Agreements (PSA)
- A PAYE Settlement Agreement (PSA) allows employers to make a single annual payment to cover the tax and NICs on minor, irregular, or impracticable benefits provided to employees. This simplifies the process, as employees do not need to include these benefits on their P11D forms, and the employer does not need to calculate tax and NICs for each individual employee
- Qualifying Benefits: Not all benefits qualify for a PSA. They must fall into one of the following categories:
- Minor: Small gifts, such as a bottle of wine
- Irregular: One-off events or items that are not provided regularly
- Impracticable: Benefits that are difficult to assign to individual employees, like shared event tickets
- Application Process: To use a PSA, employers should normally apply to HMRC before the start of the tax year. Once HMRC agrees, the employer can include the relevant benefits in the PSA
- Payment Deadline: The tax and NICs due under the PSA must be paid by 19th October (22nd if online) following the end of the tax year
Abolition of P11D Forms
The P11D form is due to be abolished in April 2026. This means that the last P11d form will be for the 2025-26 tax year. Thereafter, employers must payroll all benefits in kind as if they were salary. The benefit will appear as an extra line on the employee payslip.