What is a benefit in kind?
A benefit in kind is a non-cash perk an employee or director receives through their job, such as a company car or private medical cover, usually taxed as income.
What a benefit in kind means
Employees and directors are taxed on their pay, and also on most perks they receive because of their employment. These perks are benefits in kind (BiK). The employee pays income tax on the taxable value of the benefit, and the employer pays Class 1A National Insurance at 15% on the same value.
Common benefits in kind include company cars and fuel, private medical insurance, interest-free or cheap loans over £10,000 (including an overdrawn director's loan account), living accommodation, and goods or services provided free or below cost.
Example
A company director, a higher rate taxpayer, has a fully electric company car with a list price of £40,000 and private medical cover costing the company £1,200 a year.
| Benefit | Taxable value | Director's tax at 40% | Company Class 1A at 15% |
|---|---|---|---|
| Electric car (£40,000 × 4%) | £1,600 | £640 | £240 |
| Private medical insurance | £1,200 | £480 | £180 |
| Total | £2,800 | £1,120 | £420 |
The car percentage depends on CO2 emissions and rises for petrol and diesel cars, which is why electric company cars remain popular. Electric car rates are set to increase each year, so check the current figure before choosing a car.
How benefits are reported
Unless benefits are payrolled, the employer reports them to HMRC on form P11D by 6 July after the tax year, with a P11D(b) for the Class 1A National Insurance, which is payable by 22 July if paid electronically. HMRC then usually adjusts the employee's tax code to collect the tax. Many employers instead payroll benefits, adding the value to pay each month so the tax is collected in real time, and HMRC plans to make payrolling compulsory for most benefits from April 2027.
Benefits that are tax free
Some perks are exempt, including employer pension contributions, a mobile phone, trivial benefits up to £50 each (capped at £300 a year for directors of close companies), workplace parking, annual staff parties up to £150 per head, and eye tests for screen users.
Why it matters for your business
Benefits can be a tax-efficient way to reward people, especially through salary sacrifice into electric cars or pensions, but missing a P11D leads to penalties and unexpected tax bills for staff.
Common questions
P11D and P11D(b) forms must reach HMRC by 6 July following the end of the tax year, and a copy must go to each employee by the same date. Class 1A National Insurance is due by 22 July if paid electronically.
Yes, but it is taxed at a low percentage of the list price compared with petrol and diesel cars. The percentage is rising gradually each year, so the advantage narrows over time, though it remains one of the most tax-efficient company cars.
No, if each benefit costs £50 or less, is not cash or a cash voucher, is not a reward for work, and is not in the employment contract. Directors of close companies are limited to £300 of trivial benefits a year.