A complete guide to payrolling benefits in kind

By Ricardo Singh

Updated: 19 May 2020, first publication: 1 April 2020

Benefits in kind are allowances or compensation that are not included in payslips as wages, but carry financial value.

Payrolling benefits in kind allow companies to alter the way they are taxed and the manner in which they report their expenses. And, for many companies, it is viewed as a key component to drive employee engagement and staff retention.

However, implementing benefits in kind in payroll is a challenge for many businesses: What are examples of benefit in kind you can payroll? And how do you register for payrolling benefits in kind?

If you are an HR manager or an accountant, this article is a must-read!

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What are benefits in kind?

Benefits in kind are goods or services that a business provides to an employee. They are either free of charge or at a discounted price, in exchange for the employee's services.

Benefits in kind are used for both business and personal purposes.

For example, a smartphone that is solely used to contact customers during working hours is not a benefit in kind. The same goes for a company car that is returned before every weekend break.

Nevertheless, a benefit in kind is considered to be an additional form of compensation. As such it is:

specified in a clause of the employment contract or in an amendment
included in accounting and payroll
subject to payroll and employer's social security contributions
subject to income tax

Benefits in kind allow employers to:

give the best possible working conditions to their employees
value benefits during wage negotiations
deduct social security and unemployment contributions in certain cases

Examples of benefits in kind you can payroll

Here are some of the main types of benefits in kind you can payroll:

meals
vehicles
mileage allowances
medical insurance

Meals

This includes luncheon vouchers, meal vouchers or restaurant vouchers that are issued if there is no canteen or company restaurant.

If there is a canteen that provides meals to all employees, they should not be taxed and it should not be listed on their tax return.

Vehicles

A company car can be made available to an employee if it is required for his daily tasks. Using this vehicle for personal purposes is considered as a benefit in kind, whether the employer owns or rent the said vehicle.

Mileage allowances

If an employee gets a mileage allowance for using their vehicle for work, these payments are not taxable as long as they are within limits set by the Government. The limits are called approved mileage rates.

Tax-free mileage allowances apply only to work journeys. Work journeys are trips that employees have to make for professional purposes. Work journeys include, for example, delivering goods or making calls to customers. They do not include journeys to and from a normal workplace.

Medical insurance

You may pay medical insurance premiums on behalf of an employee. This is a taxable benefit for your employee. The value of the benefit is the gross value of the insurance premium.

Exceptions

You can payroll all benefits except:

employer-provided living accommodation
interest-free and low interest (beneficial) loans

You must still report these benefits on a P11D, even if you’re payrolling other benefits for the same employees.

If you choose to payroll company car benefits, you do not need to submit a form P46(Car).

How to register for payrolling benefits in kind

Apply to HRMC online

You need to apply to HMRC before you can start payrolling benefits in kind. Applications must be made before the start of the first tax year that you intend to payroll benefits. This means you will not need to submit a P11D for your benefits (excluding anything that can't yet be payrolled).

Once you have opted to payroll benefits, it is assumed that you will continue to payroll benefits for your employees in future years.

You can also deregister from payrolling benefits using the online service. Again, you must do so by the start of the tax year. If you decide mid-year that you do not wish to payroll your benefits you will need to wait until the start of the next tax year to deregister.

Write a payrolling benefits in kind letter to employees

Once you have decided to register payrolling benefits, you must provide employees with a letter explaining their benefits in kind and what it means for them. Template letters are available on HMRC PAYE online once you have registered for payrolling benefits.

You must also provide employees with the following information by June 1st following the end of the tax year:

Details of the benefits that have been payrolled

the cash equivalent of each benefit that has been payrolled
separate details of any benefits that haven’t been payrolled

This information can be provided on payslips or on a separate note or statement.

It should be clear to the employees:

what benefits have been subject to PAYE tax
how much of the value of each benefit you’ve collected and reported tax on

If your employees fill in a self-assessment tax return they’ll need this information so they can tell the HMRC.

How to add benefits in kind to payroll

On an employee's payslip, benefits in kind appear twice:

they are added to the base salary to obtain the gross salary;
national insurance is then calculated on this gross salary, and deducted to obtain the net salary ;
benefits in kind are then deducted from the net pay, resulting in the net amount payable to the employee.

Here is an example of an employee payslip containing benefits in kind:

To help you manage your benefits, you can use payrolling software such as PayFit.

Payrolling benefits on PayFit is straightforward. Via the "Pay Elements" section of your employee's profile, click on "Add" and fill in the benefit, its type (accommodation, meals, etc.) and the method of calculation.

If you want to choose a monthly rate, fill in the number of days for meals, or the number of rooms rented, etc. The calculation is done automatically.

You can change, delete, or carry them over from one month to the next, and find the summary of benefits in kind in the “Summary of the month” section.

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