Benefits in kind: A guide for employers and employees
Employee compensation can mean much more than just salaries. The kinds of non-cash perks you offer your staff say a lot about your company values, and can prove beneficial for your business in the long term.
Employee compensation is a huge part of your balance sheet, and employees are the lifeblood of most companies.
We could be callous and reduce those facts to a monetary figure, but fortunately there is a way to reflect employee value—and your company culture—in more human terms.
Non-cash compensation, otherwise known as benefits in kind, is a way to tap into more than just financial incentives. It’s about building a workplace where people feel valued and supported, not just paid.
This article explains how to strategically use benefits in kind to create a more engaged and loyal team, without overlooking the tax and compliance considerations.
Here’s what we cover:
What is a benefit in kind?
A benefit in kind (BIK) is a non-cash benefit that you can give to employees instead of monetary payment or instead of adding to their regular salary.
It can be a physical perk or a service, something that gives extra value beyond monetary compensation.
Benefits in kind include things like company cars, health insurance, training or gym memberships.
It’s often preferable to offer benefits instead of just paying employees more cash because non-cash equivalents can be more tax-efficient.
Also, businesses can generally negotiate better rates on services like health insurance or gym memberships than individuals can get on their own.
Extra-curricular activities and wellness programmes obviously improve employee health and morale on a personal level, and this is often reflected in the workplace. For example, better health and morale arguably lead to increased productivity and job satisfaction.
The choice of employee benefits you offer can even make you stand out in the job market, helping you attract talent.
This is particularly true of training and development perks, which demonstrate your commitment to employee growth.
Benefit in kind tax implications
Despite tax efficiency being one reason for offering benefits in kind, it’s important to understand that these benefits are taxable all the same.
They do have monetary value, and as an employer you must account for these benefits in your financial statements and for tax reporting.
Benefits in kind therefore impact your calculation of payroll taxes and your employees’ taxable income. This means benefits are subject to income tax and sometimes National Insurance contributions too.
For example, a benefit in kind could increase an employee’s overall earnings, potentially pushing them into a higher National Insurance bracket.
Alternatively, you as the employer may have to pay Class 1A National Insurance on the benefit.
It’s your responsibility to include the value of any benefits in kind on each employee’s P11D form*, which UK employers must submit to HMRC after the end of the tax year. It’s a statutory form to report taxable benefits, regardless of the employee’s tax status.
Form P11D covers each tax year ending on 5 April, and allows HMRC to accurately calculate each employee’s tax liability.
The deadline for submitting P11D forms (and providing copies to employees) is 6 July. That may seem like plenty of time, but year-end accounting tends to be hectic.
Be sure to keep accurate records of all benefits delivered throughout the year to ensure the P11D completion process goes smoothly and promptly.
*Starting April 2027, HMRC is scheduled to phase out the traditional P11D and P11D(b) forms, in keeping with a mandate to file most BIKs via the Full Payment Submission (FPS). More on this below.
How are benefits in kind calculated?
So how do you know the monetary value of the benefits you’re offering?
You need to determine the fair market value of each benefit, which you do by consulting HMRC guidelines and performing market research for benefits such as gym memberships or health insurance.
HMRC publishes advisory fuel rates for company cars, for example.
One problem with offering benefits is that there may be nuances in the way you calculate the value, depending on the type of benefit. For example, if you’re subsidising your employees’ health insurance costs, the premiums may be different for each employee. How do you treat everyone fairly?
There can often be grey areas, and you need as much clarity as possible because your reporting has to comply with HMRC guidelines.
You may need to seek professional advice from an accountant or tax advisor to ensure accuracy and fairness.
To minimise the risk of penalties:
- Keep detailed records of all benefits provided, including dates, values, and the method of calculation.
- Accurately report the value of these benefits to HMRC on the P11D form.
- Verify the specific rules for each type of benefit using HMRC’s official guidance.
- Ensure that you have correctly accounted for and paid any Class 1A National Insurance contributions due on the benefits.
- Provide employees with clear information about each BIK, including how they are valued and their tax implications.
Common benefit in kind examples
Benefits in kind vary across different companies and industries because each business niche tends to attract certain employee types.
You may have a distinct mix of female versus male employees, white collar versus blue collar, or the range of benefits available may be determined by your company’s contacts and suppliers.
There are all kinds of factors that come into play.
While there’s no guarantee that you can generalise across any particular sector, you can probably make educated guesses. For example, likely benefits or incentive packages in these cases would be:
- Tech industry: free meals, on-site gyms, and flexible work arrangements
- Healthcare sector: subsidised health insurance, life insurance, and retirement plans
- Automotive industry: company cars and fuel allowances
- Retail: employee discounts and merchandise allowances.
The move to payrolling benefits in kind
In 2016, HMRC introduced the option to report most BIK taxes through companies’ payroll systems, which in theory would take the P11D form out of the equation.
The reduction in red tape is beneficial for government, employers and employees alike. For this reason, HMRC went on to rule that payrolling most BIKs will become mandatory from 6 April 2027.
This will be done through HMRC’s Full Payment Submission (FPS) process, part of its Real Time Information (RTI) reporting option.
FPS is used to report actual payments to employees—including salary, tax, National Insurance, and benefits in kind—at the time they are made. It complements RTI’s Employer Payment Summary (EPS) function, which reports adjustments or statutory payments.
If your payroll software already supports this functionality, you should register with HMRC and begin using it voluntarily.
Doing so will help you familiarise yourself with the process ahead of the mandatory deadline.
You can’t currently payroll loans and accommodation, and they won’t be mandatory from April 2027, although employers will be able to decide to optionally payroll them if they want to.
Benefits in kind vs cash compensation
We all have bills to pay, and monetary payment—such as a base salary or hourly wage—is understandably the gold standard among forms of compensation.
One clear advantage of cash is its flexibility. Employees can use it for anything they need, from rent and groceries to savings and investments.
On the other hand, while non-cash perks can’t please everyone, they do offer unique value and can significantly boost employee morale.
While some employees may prefer a higher salary, others may find that benefits like extra holiday days, training opportunities, or childcare vouchers are more valuable to their personal circumstances. These benefits can show that a company cares about employee well-being beyond just the paycheque.
The downside of benefits in kind is that they can be more complex due to their varying values and tax implications.
They may require careful consideration and efforts to make sure they adhere to HMRC guidelines. However, that’s no reason to shun them.
With a balance between cash and the right benefits you can create a competitive compensation package. Offering a well-rounded package demonstrates that you value your employees as individuals with diverse needs.
The strategic importance of benefits in kind for employers and employees
For employers, carefully curated BIK packages can go beyond simple attraction and retention. They become tools for fostering a specific company culture.
For example, investment in training and development not only improves employee skills but also creates a pipeline for future leadership within the company.
For employees, understanding the long-term value of a BIK is crucial.
While immediate perks such as gym memberships or free meals are appealing, benefits like robust retirement plans or long-term disability insurance provide crucial financial security for the future.
Employers who succeed in communicating the long-term value of these benefits cultivate employee loyalty and reduce turnover.
Final thoughts
When implemented strategically, benefits in kind can have a positive impact on employers and employees alike.
A well-structured benefits programme demonstrates your company’s commitment to the staff’s holistic well-being, both now and in the future.
However, managing benefits effectively requires meticulous record-keeping and accurate reporting to HMRC. To streamline this process and ensure compliance, consider leveraging a payroll software solution.
Today’s solutions can automate calculations and integrate with your accounting systems, saving you time and reducing the risk of costly errors.
Most systems are being adjusted to automate the upcoming change around registering benefits in kind in real time.
The post Benefits in kind: A guide for employers and employees appeared first on Sage Advice UK.