Many employers like to include ‘benefits’ as part of an employment contract to provide a more attractive proposition to potential and existing employees. The most popular benefits an employer can make available are:
- Company cars
- Health insurance
- Gym memberships
Employees may not be aware that they are often personally liable to pay tax on these benefits that are provided to them by their employer. The reason that they are taxable is that, in HMRC’s eyes, benefits are provided as a substitute for normal pay that would otherwise be taxable through PAYE. Therefore benefits are taxable in the same way (and at the same rates).
‘Benefits in kind’ (as HMRC calls them) are reported to HMRC on a P11D form annually, shortly after the end of the tax year, and the Revenue then assesses how much additional tax is due from the employee. This tax is technically payable immediately, however HMRC will normally adjust an employee’s tax code to collect the tax in instalments over the following year so that the employee isn’t required to make an unexpected lump sum tax payment.
If you do receive a request for a lump sum payment, it’s always worth asking HMRC if you can spread the payment over the next twelve months as they are normally quite accommodating. When you receive your tax coding notice you may see that there is an adjustment for ‘benefits in kind’ or ‘P11D benefits’. If you see this, it means that HMRC thinks that you are receiving taxable benefits from your employer.
When you change jobs, HMRC will often assume that your benefits continue in your next employment, so it’s particularly important to check that your tax code is correct when you move jobs. If you think your tax code is incorrect and would like help to get it corrected, just get in touch with your client manager at OC.
Class 1a National Insurance
In addition to the employee paying tax on a benefit, the employer is also required to pay Class 1A National Insurance contributions.
‘Benefits in kind’ rules only apply to employees taxed under a PAYE scheme, not to partners (or sole traders) taxed under self-assessment. Therefore, if you are a Partner in one of our LLP models then you won’t need to pay any of the tax charges mentioned above!
The quirky side of HMRC rules state that the provision of hot water for drinks is a tax-free benefit. So is the provision of a mobile phone, parking and meals in a staff canteen.
We wonder if the latter becomes taxable if an employee ate their meal at their desk? The annual Christmas party is also a free of tax benefit, provided the cost per employee doesn’t exceed £150 and the party is open to all employees. Although it’s listed as a Christmas party, it actually extends to one party event per tax year, so could be a summer party instead.