Benefits in kind include a variety of items that are provided to an employee as a result of their employment (either by the employer or a third party) and can include such things as motor cars, private fuel, private medical or insurance cover, school fees and childcare costs, lunch vouchers or canteen facilities, private travel and car parking, private personal liabilities etc. and are in general (with the exception of the provision of motor vehicles) a tax efficient method of remunerating employees since the value of the tax due is calculated on the actual value of the benefit. Should the employee opt to pay for the same benefit out of net salary instead, tax and NIC would in effect be due on the grossed up equivalent amount.
For example if private health insurance of £500 is provided as a benefit in kind, the tax due for a basic rate taxpayer is £100 and the NIC cost to the employer is £69 – the total tax and NIC charge is £169. In the event that the employee pays for the same benefit out of net salary, that would take an equivalent gross salary of £735 (less tax of £147 and NIC of £88) to provide the net amount of £500. In addition the employer’s NIC would be calculated on the gross amount so that would be £101. The overall tax due in providing the same benefit through net salary is therefore £336 compared to £169 as a benefit in kind – i.e. almost double.
For higher rate taxpayers the saving is even greater as, in the example above, it would take £862 to provide a net amount of £500 (tax of £345 and NIC of £17) on which the employer’s NIC would be £119 bringing the total tax and NIC due to £481 compared with £200 – an increase of 140%.
The provision of motor vehicles is a much more complicated scenario since the actual benefit in kind charge is based on the CO2 emission rather than the value of the vehicle and the suitability therefor depend on the specific circumstances.
The value of the Benefit in Kind is in general, reduced by any amount that the employee pays for the receipt of such benefit.
It is possible to arrange for a Salary Sacrifice scheme whereby gross salary is formally given up in exchange for an equivalent amount to be received as Benefit in Kind but care should be taken in such arrangements as they can have other implications, for example in respect of borrowing levels and pension entitlement which are dependent on gross salary.
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