Tax on Company Benefits

If you run a business then you may decide to give your employees some benefits in addition to their salary. Some companies arrange health cover, company cars or even accommodation for their staff members. And employers are responsible for making sure that they collect tax on company benefits through the PAYE system.

In this guide we take a look at how tax on company benefits works. We also answer common questions like “what are the tax rules on company cars?” and “what company benefits are tax free?”

Table of Contents

What are company benefits?

Company benefits are free perks you provide to your employees. They are also often called benefits in kind (BIK). They include things like company cars, gym membership, health care and accommodation provided for staff members.

These benefits have monetary value and they may be treated as taxable income, depending on the type of benefit.

What are the tax rules on company benefits?

Employees need to pay tax on company benefits like cars, accommodation and loans. The amount of tax owed depends on the kind of benefit and the value of those benefits. Businesses are responsible for collecting tax through the Pay As You Earn (PAYE) system. Employees also owe tax and National Insurance on anything that is paid in cash by their employer as this is treated as extra earnings.

Some company benefits are tax-free like childcare and canteen meals.

What company benefits are taxable?

Several company benefits are taxable and employees will be taxed on the value of those benefits. Taxable benefits include the following:

  • Company cars used for personal use.
  • Fuel for personal use of a company car.
  • Accommodation provided rent-free or below market value that’s not essential for an employee’s job.
  • Clothing allowance that’s not essential for the employee’s job.
  • Private medical insurance.
  • Private school fees for employees’ children.
  • Loans of over £10,000 provided at below market cost to employees.
  • Free holidays or holiday vouchers.

The tax rules are complicated so speak to your account if you're not sure if a company benefit is taxable.

What company benefits are tax free

Some company benefits are tax free, including the following:

  • Free or subsidised meals in a staff canteen or meal vouchers
  • Hot drinks and water at work
  • Work mobile phones and IT equipment
  • Workplace parking for cars, motorbikes and bikes
  • Christmas and other annual parties, as long as they cost £150 or less per head and are open to all employees
  • Health screening, medical check-ups and counselling
  • Medical treatment so that employees can return to work
  • Certain living accommodation, if employees need to live there as part of their job
  • Payments towards energy of household costs while employees work at home
  • Incidental overnight expenses
  • Cost of travel between home and work for disabled staff members
  • Employer-funded training
  • Cost of travelling home when sharing arrangements are disrupted
  • Work buses and subsidised public bus travel
  • Bicycles and cycling safety equipment
  • Sports facilities like company gyms

How does tax free childcare work?

Employees can get up to £500 every 3 months (£2,000 per year) for each child to help with childcare costs. This goes up to £1,000 every 3 months for disabled children (£4,000 per year). This £500 entitlement is on top of the 30 hours free childcare available for 3 to 5 year olds.

Employees need to register for an online childcare account. For every £8 paid into this account, the government will pay in £2 to use with a childcare provider.

How do childcare vouchers work

Employees can save money on their childcare by buying childcare vouchers from their pre-tax salary. These vouchers are paid for out of gross pay, so employees will save money on Income Tax and National Insurance. The scheme works by an employee agreeing to sacrifice some of their salary in exchange for childcare vouchers.

If employees pay basic rate tax, it will only cost £680 to buy £1,000 worth of childcare vouchers. That’s because employees pay 20% income tax and 12% National Insurance (£320 in total on £1,000). This is going up to 13.25% in April 2022.

What are the tax rules on company cars?

Employees will owe tax on their company car if they use it privately, including for commuting. They must tell HMRC if they get or change a company car or if a change affects the value of their company car.

Tax is based on the value of the company car and also depends on the type of fuel it uses. The value of the car is reduced if the following applies:

  • you have it part-time
  • you contribute towards the cost
  • The car has low CP2 emissions

What is an employees’ tax liability on company benefits?

The tax liability on company benefits depends on the financial value of the benefit and the employee’s tax band. Basic rate taxpayers will owe tax of 20% on the value of benefit in kind. Higher rate taxpayers will pay Income Tax of 40% or 45% on a benefit in kind.

Employees may also have a National Insurance charge on some company benefits like vouchers or benefits paid in cash. That's because they are treated as extra wages.

What is an employers’ tax liability on company benefits?

If you provide taxable company benefits to your employees you will also need to pay employers’ National Insurance on the taxable value of the benefit. Employers are also responsible for collecting any Income Tax and employees’ National Insurance through the PAYE system.

Employers need to complete a P11D form for each employee receiving company benefits and submit it to HMRC. This form sets out the value of company benefits received during the tax year and needs to be completed by 6 July in the year after the benefits were given. You should also ask employees to check their P11D form before it’s submitted to HMRC.

What are the rules for National Insurance on company benefits?

Employees won’t usually have to pay National Insurance on company benefits. They do have to pay National Insurance on things that are paid in cash, as they’re treated as earnings. For example, if an employer gives their employee a gift that they could sell instead of keep, they will pay National Insurance on the value of the gift.

Employers need to pay Employers’ National Insurance contributions on some benefits provided to employees. Ask your accountant for details.

How to calculate fringe benefit tax on a company car

Employees can calculate the tax due on your company car by using the HMRC Company Car and Car Fuel Benefit Calculator. They will need to provide information on the car, their length of use, if they contribute to the cost of the car and whether their employer pays for private fuel.

How much tax do you pay on a company car?

Tax payable on company cars and vehicles varies considerably, depending on the type and value of the car.

Electric vehicles currently have a taxable value of 1% of their list price, whereas many petrol and diesel cars have a taxable value of 24% to 28% of their list price. This makes a big difference to the amount of tax an employee will pay.

For example, an electric Peugeot e-208 has a list price of £30,200 and a taxable value of £302 (1%) whereas a petrol Peugeot 208 has a list price of £19,375 and a taxable value of £5,231 (27%). This means an employee paying higher rate tax would pay £120 per year tax on the electric Peugeot e-208 compared with £2,092 tax per year on the petrol Peugeot 208.

Frequently asked questions

Benefits in kind tax calculator

You can calculate tax due on a company car using the HMRC company car and car fuel benefit tax calculator.

What is a P11D form?

Employers are responsible for completing a P11D form for each employee who receives company benefits. The form sets out the company benefits received during a year and their taxable value. Employees should be asked to check the form to make sure it is accurate.

What are the tax rules on health insurance?

Health insurance is classed as a taxable benefit. This means employees will have to pay tax on the cost of the insurance premiums.

Some health benefits are tax free, like annual health check-ups, eyesight tests where employees use a computer and medical insurance while employees are working abroad.

What are the tax rules on loans?

Employees owe tax on low interest and interest free loans of over £10,000 from their employer. Tax is due on the difference between the interest rate they pay and the official interest rate set by the Bank of England.

What are the tax rules on living accommodation?

Employees may need to pay tax if they are living in accommodation provided by their employer. Employees that need to live in accommodation to do their job better may not owe tax. For example, agricultural workers living on farms or ministers living in a manse.

Who is responsible for collecting tax on company benefits?

An employer is usually responsible for calculating tax on company benefits. This will be collected through the PAYE system.

What is the company car tax on older cars?

Tax on older company cars is usually higher as the tax band is based on a car's emissions. It may be cheaper for employees to use a new electric car which has a very low tax band.

What is the company car tax on electric cars?

There are currently ultra-low tax bands for electric vehicles. This means that employees will pay just 1% tax on the list price of electric vehicles until April 2022 and 2% for the next 3 financial years.

Can you claim tax back on company car mileage?

Employees can claim back up to 45p per mile for fuel used for business trips. They are not allowed to claim mileage for any journeys made between the home and normal place of work. Car users can only claim a lower business mileage rate of 25p once they have travelled over 10000 miles per year.

What are the tax rules for hybrid company cars?

Most hybrid cars currently have a taxable value of 7% or 11% of the list price. This is considerably lower than for petrol or diesel cars but slightly higher than pure electric vehicles.