There are a number of options for an employer to reward their employees in addition to paying a salary. One of the most common and most flexible options is to offer benefits in kind (BIKs). These BIKs can take various forms and can provide tax benefits for both the employer and the employee.
The HM Revenue & Customs (HMRC) broad definition of a BIK is anything of monetary value provided to employees that is not ‘wholly, exclusively, and necessary’ for them to perform their contractual duties.
Although there are many complex rules that cover different types of BIKs, these fall into two broad categories – taxable and tax-free.
HMRC provide an extensive list of tax-free benefits, including for example childcare vouchers and meal vouchers. There are, however, many limits and exceptions within each of the options, so HMRC’s rules should be checked.
HMRC also provides a brief list of taxable BIKs, including for example company cars for personal use and private medical insurance. Again, the rules are complex and include various exemptions so HMRC’s rules should be checked.
Calculating tax liabilities – employees and employers
Employee’s tax liability
An employee will have to pay income tax on the financial value of the BIKs they receive (the ‘cash equivalent’ in HMRC terminology).
The amount of tax the employee pays will be based on their income tax band – 20%, 40% or 45%.
With some taxable BIKs, such as vouchers or benefits paid as cash, employees may also incur an additional National Insurance (NIC) charge.
Employer’s tax liability
Employers will also need to pay tax in the form of an employer’s Class 1A NIC of 13.8% of the taxable value of the benefit.
The cost of providing BIKs is an allowable tax-deductible expense that can help reduce profits liable to Corporation Tax (CT).
Forms P11D and P11D(b)
An employer is responsible for reporting the BIKs received by an employee. This is reported to HMRC by completing and submitting form P11D, which outlines the cash value of any BIKs received over the tax year. These are only benefits or expenses that have not already been included in your wages.
The deadline for submission of the P11D form is 6 July, following the tax year in which the employee received the benefit. An employer should also provide a copy of the P11D form to the employee.
An employer must also complete an additional P11D(b) form, which relates to the benefit-related NIC due. This form is submitted at the same time as P11D form.
Payrolling BIKs
HMRC has announced that from April 2026 it will become mandatory for all employers to payroll taxable BIKs and to pay Class 1A NIC via payroll. In addition, HMRC will introduce a new online service for employees to claim tax relief on business expenses not borne by employers.
Currently, employers are required to report BIKs on a P11D form, however employers can voluntarily payroll certain BIKs. Some reporting after the end of the tax year is still necessary, such as the completion of an employer return P11D(b)form and payment of Class 1A NICs. Certain benefits, such as beneficial loans and accommodation provided to employees, are excluded from voluntary payrolling so that P11Ds are still due.
It is intended that this change will simplify the reporting and collection of income tax and Class 1A NICs arising on BIKs. The proposed start date of April 2026 will be challenging given the required consultation, legislation and HMRC guidance update, payroll software updates and required training for employers.
Trivial Benefit Exemption (TBE)
In April 2016, legislation was introduced, providing clarity as to what small benefits are deemed to be trivial and, therefore, exempt from tax and reporting obligations. The conditions to be satisfied are as follows:
- the cost of providing the benefit cannot exceed £50 per employee (including VAT), or the average cost per employee if provided to a group of employees, and it is impracticable to work out the exact cost;
- the benefit is not cash or a cash voucher (but gift cards would qualify as long as they are not exchangeable for cash);
- the employee is not entitled to the benefit as part of any contractual obligation (including under salary sacrifice arrangements);
- the benefit is not provided in recognition of particular services performed (or in anticipation of such services) or as part of their normal employment duties.
Should the cost of the benefit exceed £50, the whole amount will be taxable rather than just the excess.
In most instances, an employee can receive multiple trivial benefits throughout the year, as long as each one does not exceed £50. However, where the employer is a close company, the exemption is capped at a total cost of £300 in the tax year, where the benefit is provided to an individual who is a director or other office holder of the company (or a member of their family or household).
Examples of trivial benefits, Per HMRC’s guidance, include:
- taking a group of employees out for a meal to celebrate a birthday;
- buying each employee a Christmas present or birthday present;
- flowers on the birth of a new baby
PAYE Settlement Agreement (PSA)
A PSA is a voluntary arrangement between an employer and HMRC that allows the employer to make a single annual payment to cover the tax and (NICs) on minor, irregular, or impracticable employee benefits and expenses. This simplifies the administrative burden of reporting these benefits individually through payroll or P11D forms. A PSA with HMRC allows employers to settle the tax and NICs due on certain expenses and benefits provided to employees with a single annual payment. This arrangement simplifies the reporting process and ensures compliance while reducing the administrative burden for employers.
The benefits that can typically be included in a PSA include small gifts, non-routine staff entertainment, or other irregular benefits. These items are either impractical to apportion per employee or minor enough not to justify individual taxation.
Certain items are excluded from PSAs:
- Cash payments, including bonuses and round sum allowances
- High-value benefits like company cars and medical insurance
- Regular benefits, which should be reported through payroll or P11D forms
For employers, a PSA’s primary benefit is its administrative ease. By settling tax obligations centrally, the need for detailed reporting on individual P11D forms for each affected employee is removed. For employees, the advantage lies in receiving these benefits free of tax, which can be particularly beneficial for lower-value items that might otherwise disproportionately increase their tax burden.
Employers need to apply to HMRC to set up a PSA. This involves agreeing with HMRC on exactly what expenses and benefits will be included in the agreement. The process is now simplified through a new online service launched by HMRC, allowing employers and their agents to apply for, amend, or cancel a PSA digitally.
The deadline to apply for a PSA each year is 6 July, following the end of the tax year in which the benefits were provided. Employers who wish to initiate or renew their PSA must do so by this date to ensure compliance for that tax year.
Once a PSA is in place, the employer is responsible for calculating the tax and NICs due on the benefits covered by the agreement. This calculation should consider the combined value of the benefits provided and the tax rates applicable to the employees benefiting from them.
Payments under a PSA must be made by the 22 October following the end of the tax year to which the PSA applies, or by the 19 October if payment is made by post. Failure to meet these deadlines can result in fines and interest charges.
