What are benefits in kind? A UK employer guide

In the UK, benefits in kind (BIK) are perks or advantages provided by an employer that aren’t part of an employee’s regular salary. They can include things like company cars, private health insurance, or subsidised accommodation.

Even though they aren’t paid as cash, most benefits in kind have a monetary value and are treated as taxable income by HM Revenue & Customs (HMRC). Employers must therefore report them correctly to remain compliant.

Examples of common benefits in kind

Employers often use benefits in kind to attract and retain talent. They will usually come in the form of perks, memberships, or services which employees may otherwise struggle to afford, making them an attractive reason to join, or stay with, a company. Examples include:

• Company cars and fuel allowances
  
• Private medical insurance (more common outside of the UK, but still popular within the UK as it may give people access to treatments not available on the NHS, or otherwise help them circumnavigate long waiting lists)
• Interest-free or low-interest loans (e.g., season ticket loans, car loans
  
• Accommodation or housing support
• Gym memberships
• Childcare support
  
• Assets transferred to employees (such as laptops for personal use)
  
  

Some benefits are tax-free, such as employer pension contributions, mobile phones for business use, and workplace canteens offering free or subsidised meals. But many must be treated as taxable income – a measure put in place largely to stop companies using benefits in kind purely for tax avoidance purposes.

How are benefits in kind taxed in the uk?

Many benefits in kind are subject to BIK tax. HMRC assigns a taxable value to each type of benefit. For example:

• Company cars are taxed if used for private travel, which includes commuting. This is based on factors such as the value of the car. Similar rules apply if your employer pays you a fuel allowance for private journeys.
  
• Loans are taxed on the difference between the interest charged and HMRC’s official rate. However, this only applies if the value of the loan is above £10,000.
  
• Medical insurance is taxed on the full cost of the premium your employer pays on your behalf. However, some medical benefits
  
  

Employees pay income tax on many benefits in kind, while employers may also need to pay Class 1A National Insurance Contributions (NICs). In all cases, make sure you find out what rules apply to your business before going ahead with a benefit in kind scheme, as you may end up with an accidental tax burden on your shoulders.

You can read more about how benefits are taxed on the government’s website.

Employer responsibilities for reporting benefits in kind

Employers are responsible for ensuring that all benefits in kind are accurately reported to HMRC. This is usually done through the annual submission of a P11D form for each employee who has received taxable benefits. In addition, employers must file a P11D(b) form, which summarises the total benefits provided across the workforce and declares the amount of Class 1A National Insurance Contributions (NICs) owed. These forms act as the official record of the value of perks provided and the associated tax liabilities.

Accurate record keeping is essential, as HMRC requires employers to maintain evidence of how the taxable value of each benefit was calculated. This includes invoices, contracts, or calculations related to benefits such as company cars, loans, or medical insurance. Records not only support compliance but also protect businesses in the event of an HMRC enquiry. Many of our customers store these details within the SenseHR system, either using the standard information screens or by building their own custom benefits screens.

Employers must also be mindful of deadlines. The standard cut-off date for submitting P11D and P11D(b) forms is 6 July following the end of the tax year, with payment of any Class 1A NICs due by 22 July. Missing these deadlines or submitting incorrect information can lead to penalties, interest charges, and reputational damage. For this reason, many businesses now rely on payroll software or HR tools to streamline reporting and minimise the risk of costly errors.

Benefits in kind vs. salary: what employers need to know

While both salary and benefits in kind increase an employee’s taxable income, there are difference.

Salary is straightforward – it’s taxed through PAYE, which is calculated in the same way you’re probably used to for most of your workforce. But benefits in kind sometimes require more complex calculations and reporting, and sometimes need to include Class 1A National Insurance Contributions.

But with benefits in kind being taxable, and kinda complicated, you may be wondering why it doesn’t make more sense to just increase a person’s salary and let them decide what to spend it on? But there are a number of reasons!

For example, offering perks may feel more valuable than an equivalent salary increase, to the employee. This is especially true if you can negotiate a bulk discount on a product such as a gym membership – where the price you pay is actually far lower than what each individual would need to pay if they signed up themselves.

When structured well, benefits in kind can improve employee satisfaction without disproportionately increasing payroll costs. You’ve just got to think a bit outside the box, and dive into some of the psychology behind what you’re offering.

How to report benefits in kind to HMRC

Employers currently have two main ways to report taxable benefits to HMRC. The traditional route involves completing a P11D form for each employee who receives benefits not taxed through payroll. In addition, employers must submit a P11D(b) form at the end of the tax year to declare the Class 1A National Insurance contributions (NICs) due on those benefits. These forms must be filed online (or via approved commercial software) by 6 July following the end of the tax year.

The alternative, increasingly popular approach is payrolling benefits in kind, where employers register with HMRC (via the PAYE online service) before the start of the tax year to report taxable perks through payroll in real time. Once registered, the value of permitted benefits – such as company cars, medical insurance, and gym memberships – is added to each employee’s pay and taxed with each pay period. This method eliminates the need for employee-specific P11D forms, though the employer still needs to submit P11D(b) for Class 1A NICs.

Payrolling offers several advantages: it reduces paperwork at year-end, smooths out employee tax deductions over the year (improving transparency), and helps avoid surprises from retrospective tax code adjustments. However, employers must still maintain detailed records of benefits and conform to HMRC’s reporting procedures – even when payrolling

Managing benefits in kind with HR software

Manually managing benefits can be complex and time-consuming. Using an HR BIK management tool or automated BIK payroll solutions helps employers:

• Track taxable benefits in real time
  
• Automate calculations for accuracy
  
• Ensure compliance with HMRC rules
  
• Simplify payrolling or P11D submissions
  

A compliant benefits in kind management system reduces errors, saves time, and ensures both employees and HMRC receive the correct information.

There are a few ways to approach this:

1. Use a dedicated payroll platform. Some payroll platforms are designed to automatically calculate and withhold tax on benefits during each pay run, which reduces your year-end administration and improves transparency.
2. Use a full-service HCM system. Some platforms designed to handle broader HR functions may also include BIK management within their payroll modules.
3. Customise your SenseHR system. Sense is a highly customisable HR system that lets you track and automate almost any task – including integrations into payroll.

To learn more about SenseHR, explore our main website here.

Best practices for UK employers offering benefits in kind

Managing benefits in kind effectively requires more than submitting forms once a year. Employers need a proactive approach that balances compliance with employee engagement. One of the most important practices is keeping accurate records of all employee perks.

As part of this, HMRC requires businesses to retain supporting evidence (such as invoices, contracts, and calculations) to show how the taxable value of each benefit was determined. Well-organised records not only simplify reporting but also protect businesses in the event of an enquiry.

Another critical area is communication with employees. Many staff members may not realise that some perks are taxable, or how this impacts their take-home pay. Being transparent helps prevent misunderstandings and ensures that employees appreciate the true value of their reward package. Where possible, employers should include benefit details on payslips (if payrolling) or provide explanatory notes alongside annual statements.

Employers should also review benefits packages regularly to ensure they remain both cost-effective and attractive. For example, company car schemes are increasingly shifting toward electric vehicles, which are taxed at lower BIK rates, while healthcare perks remain consistently popular. Reviewing benefits at least annually allows organisations to adapt to both workforce needs and changing tax rules.

Practical best practices include:

• Maintain detailed records of every benefit provided, including evidence of valuation.
  
• Be transparent with staff about which perks are taxable and how tax is calculated.
  
• Audit your benefits package periodically to check cost-effectiveness and employee demand.
  
• Use HR and payroll software to automate calculations, reduce errors, and simplify submissions.
  
• Stay up to date with HMRC rules to ensure ongoing compliance and avoid penalties.
  

Technology is increasingly central to compliance. With the mandatory payrolling of benefits expected from 2026, adopting HR software or automated BIK payroll solutions will become essential. These systems reduce administrative work, ensure accurate tax treatment, and provide employees with real-time visibility of their benefits.

When handled properly, benefits in kind can not just increase compliance, but can also enhance employee satisfaction, support recruitment and retention, and demonstrate a genuine commitment to offering competitive and fair rewards.

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