A guide to employee benefits
To help attract and retain the best employees, many companies consider using staff benefit schemes.
Understanding how they work requires training though, so we’ve created this useful guide to help you out. A key feature of the relationship between employers and their staff is a good rewards package. It's a helpful way of showing recognition for hard work, improving morale, and increasing staff retention. However, some benefits need to be compliant with tax legislation, which makes it crucial to do your research.
What is a taxable benefit? Is health insurance benefit taxable? These are questions you might be asking. Thankfully, we’ve done the hard work for you in digesting the various tax laws on employee benefits.
Let us guide you through the answers to the most commonly asked questions:
Are benefits a taxable income?
Yes, in some cases. Employee benefits are often called ‘fringe benefits’, with employees being the ones who are taxed on this benefit. The employer is required to work out the amount due and deduct it from their wages through Pay As You Earn (PAYE).
What is a taxable benefit?
Employees pay tax on benefits like cars, accommodation and loans. Your employer then takes the tax you owe through PAYE. The amount you pay depends on what kind of benefits you get and their value, which is worked out by the employer.
Some tax-exempt benefits include:
· Workplace parking spaces
· Mobile phones
· Medical expenses
· Cars and Vans
Benefit in kind
What is a benefit-in-kind?
Benefit-in-kind (BIK) is a tax on employees who receive benefits or perks on top of their salary. For example, if you have a company car for private use, you will have to pay a BIK contribution.
Some BIKs will not be taxed and should not be entered on your tax return. These include:
· Contributions into an approved occupational or personal pension scheme
· Counselling services
· Childcare arrangements
· Gifts under the value of £250 in a single year
· Equipment and facilities to help you carry out your job (disabled employees)
How do I work out BIK tax?
If you have any taxable BIKs, and you complete a tax return, you must enter the value on the employment page of your tax return for the relevant year – even if the tax has already been paid on them under PAYE.
An useful example would be to calculate the BIK of a company car. First, you need to take the company car’s P11D value. This is its list price, including VAT, along with any other delivery charges. It doesn’t include the car’s registration fee or annual Vehicle Excise Duty (VED) figure.
You’ll then need to multiply the P11D value by the vehicle’s company car tax rate – a percentage – which is set based on its CO2 emissions. These percentages change every year, which is why company car tax needs to be recalculated annually. It’s also important to note that diesel cars face a 4% surcharge on top of the base percentage for their band.
You can also use the HMRC Company Car and Fuel Benefit Calculator if you find this option easier.
As an important reminder, you’ll need to inform employees of the value of any benefits by the 6th July after the tax year ends. This value should be incorporated within their PAYE codes, and reduce their personal allowance. An alternative way to calculate BIK tax is through payroll benefits.
What are payroll benefits?
This is where payroll collects any of the benefits tax that is due. You'll be required to inform HM Revenue & Customs (HMRC), as well as any staff receiving the employee benefits, that this is your chosen method. This should be done before the start of the tax year, or on the employee’s first payday if they have recently joined the company.
This deducts the tax from each pay slip, so the employee will have paid it on time and in full by the end of the tax year.
Medical insurance tax
Is health insurance benefit taxable?
You will only be taxed on the cost of insurance premiums if your employer pays for your medical insurance. Some instances where you can receive tax-free health benefits from your employer include:
- Medical insurance when staff are working abroad
- Annual Check-ups
From 1st January, 2015, your employer can pay for £500 of medical treatment for you without it being considered a taxable benefit. This only applies in cases where it's used to assist your return to work or if you have been absent for at least 28 days through illness.
How is private medical insurance taxed?
You usually pay tax on the cost of the insurance premiums if your employer pays for your medical insurance. In cases where health insurance isn't tax-free, the employer is required to report it on the P11D as well as paying Class 1A National Insurance on its value.
What you need to report and pay depends on:
- The kind of treatment or insurance you provide
- Whether you pay the provider directly
If you reimburse the employee for its cost, or you pay the insurance provider but staff arrange the treatment or insurance, then you’d need to add its value to their earnings. This should be done when deducting and paying Class 1 National Insurance through payroll.
Company car tax
Do you pay national insurance on a company car?
While you don’t have to pay tax on employee benefits, you are required to pay employers’ National Insurance on them, so this would be due on a company car. Employees’ National Insurance is never deducted unless they receive cash benefits, as these are classed as earnings.
What will I pay in company car tax?
Class 1A and Class 1B National Insurance will need to be paid by the employer for a company car and other tax benefits, with the 2018-2019 rate being 13.8%. The employee will be required to pay tax on the value of the car if they or their family uses it for private activity.
There's another level of BIK to consider if you're driving a diesel. All diesel models have a 3% surcharge added to their BIK tax, but as of 6th April, 2018, this has increased to a 4% surcharge. This applies to all diesel models that can't meet the Real Driving Emissions Step 2 (RDE2) 'real-world' driving section of the new Worldwide Harmonised Light Vehicles Test Procedure (WLTP) efficiency standards.
How much is benefit in kind on a company car?
The tax owed by employees is dependent on the factors that determine the car’s value, such as the type of fuel it uses and the cost to purchase. This will be less if it’s used part-time, has low CO2 emissions, or the employee has paid money towards it. If you’ve paid for fuel an employee used on private journeys they will need to pay tax on this separately.
Manage your expenses with Allstar cards
One of the most commonly used benefits that is available to employees would be the use of a company car. Running a car can be quite costly when all figures are taken into account, but one way you could control this is by finding a fuel plan that’s cost-efficient to your business.
With an Allstar fuel card, you’ll have access to the cheapest fuel in the UK. Not only that, but you’ll be able to monitor and control how your drivers spend too. Alternatively, the Allstar Supermarket+ fuel card is ideal for SMEs, giving access to the biggest low-cost supermarkets, like Asda, Tesco and Sainsbury’s.
You’ll also receive PAYG AA Breakdown and M6toll as standard, helping to further reduce your costs.
To discover more of the benefits of an Allstar fuel card, get in touch with our team today on 0345 266 5101