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What is Employee Benefits?

Employee benefits are non-cash perks an employer provides on top of salary, such as health insurance, a company car or gym membership. Some are tax-free, but many are taxable benefits in kind that must be reported to HMRC.

Example

A company gives each employee a 40 pound gift card at Christmas. It is a trivial benefit under 50 pounds, so there is no tax or reporting.

Key Dates

Taxable benefits go on a P11D after the tax year ends, or are payrolled

How Employee Benefits Works in Practice

Employee benefits are things an employer provides to staff other than ordinary pay. Examples include private medical insurance, a company car, subsidised meals, gym membership, gifts and pension contributions. For a small company they can be a cost effective way of rewarding people, but the tax treatment varies a lot, so it pays to know the rules before you offer them.

In tax terms, a benefit given to an employee or director outside their salary is a benefit in kind. Many are taxable. The employee pays income tax on the value, and the employer pays Class 1A National Insurance. Taxable benefits are normally reported to HMRC on a P11D after the end of the tax year, or the employer can choose to payroll the benefits so the tax is collected through the regular payroll.

Some benefits are tax-free if they meet the conditions. Trivial benefits are one of the most useful for small companies. A benefit costing no more than 50 pounds each time, which is not cash, not a reward for work and not a contractual entitlement, can be given tax-free. For directors of close companies and their family, there is a cap of 300 pounds in a tax year. Employer pension contributions are generally tax-free for the employee, within limits, and a cycle to work scheme set up correctly can also be tax-free.

Always check the conditions before giving a benefit. A gift of cash or a voucher that can be turned into cash is usually taxable. If you provide a benefit that turns out to be taxable and you have not reported it, you may face interest and penalties. Check the A to Z of expenses and benefits on gov.uk for the detail.

Step by Step

When you plan to give a benefit, decide whether it falls into a tax-free category, a taxable one or an exempt one. Check the conditions on gov.uk and record the cost and reasoning in your files.

For taxable benefits, work out the value using HMRC's rules. At the end of the tax year, submit a P11D for each employee or director who received them and pay Class 1A National Insurance. Alternatively, register to payroll the benefits before the start of the tax year so tax is collected through each payslip.

Give employees a copy of the information on their benefits, and keep your records with your payroll papers.

Practical Tips

  • Check the rules for any benefit before you offer it
  • Keep a record of trivial benefits and their cost, especially for directors
  • Consider payrolling benefits if you provide them regularly
  • Ask an accountant before offering a company car or private health cover

Common Mistakes to Avoid

  • Assuming all gifts to staff are tax-free when they are not
  • Giving cash or cash vouchers as a trivial benefit, which is not allowed
  • Going over the annual cap for directors of close companies without realising
  • Forgetting to report taxable benefits on a P11D or through payroll

Frequently Asked Questions

What are trivial benefits?

Small non-cash gifts costing up to 50 pounds each that are not a reward for work or a contractual entitlement. For directors of close companies, the total is capped at 300 pounds in a tax year.

Are employee benefits taxable?

Some are and some are not. Taxable benefits in kind are reported on a P11D or through payroll. Others, such as qualifying trivial benefits and employer pension contributions, are tax-free.

What is a P11D?

It is the form an employer uses to report taxable benefits and expenses to HMRC after the end of the tax year.

Can directors get tax-free benefits?

Yes, but the rules for close companies are stricter. The 300 pound annual cap on trivial benefits applies to directors and their family members.

Source: https://www.gov.uk/expenses-and-benefits-a-to-z

Related Terms

Benefit in Kind (BIK)

A Benefit in Kind is a non-cash perk from your employer (like a company car or health insurance) that's taxed as if it were salary.

Trivial Benefits

Trivial benefits are small perks (under £50) that employers can provide tax-free, without reporting to HMRC.

P11D

A P11D is a form employers use to report benefits and expenses provided to employees that aren't included in payroll.

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