When it comes to the taxation of certain employee benefits, it can get a bit confusing. What exactly do you pay tax on and what exactly is tax-free?
If you’re looking to take out any form of Employee Benefits package for your employees then you’ll need to know about benefits in kind, the P11D form and how these work.
A benefit in kind is effectively a benefit that an employee or director receives from their employer. It’s not counted as part of their salary. For instance, benefits in kind include:
While benefits in kind are usually highly valued, there’s an issue that complicates the matter — how employee benefits are taxed.
Because the company pays for benefits with pre-tax earnings and provides them in addition to an employee’s salary, HMRC effectively sees this as the employee’s salary rising without the additional amount being subject to PAYE tax.
So to reclaim the additional tax, HMRC requires one of two options. Firstly, employers can take the owed tax from their employees through payroll. Alternatively, the employer can declare these expenses at the end of the tax year in order for HMRC to value and tax them accordingly.
When completing their end of year financial reporting, employers need to fill out a P11D form. This is a way to report employer-provided expenses and benefits the employer paid for that tax year.
Employees don’t usually need to fill out a P11D form when they receive a taxable benefit. However, if you’re a freelancer or contractor arranging a P11D benefit via your company, you’re technically both employer and employee. In your capacity as the employer, you’ll therefore need to fill out a P11D as part of your self-assessment tax return.
This depends on the employee benefit in question. A brief summary of the tax position on the four most common types of employer-provided group insurance policies is laid out below.
However, we strongly recommend you seek professional advice on your company’s tax position before implementing an employee benefit.
Business Private Medical Insurance is a taxable company paid insurance policy.
The typical way that employer-provided Medical Insurance is taxed is that the business pays for the premiums and employees pay tax on the benefit.
HMRC usually does this with an adjustment of an employee’s personal allowance, so employees earn less before tax is paid in the following tax year.
Group Life Insurance — also known as Death in Service cover — is generally permitted as a business expense for an employer. Employees usually don’t have to pay any tax on group life insurance premiums, either. This is because Group Life Cover is HMRC approved and isn’t considered a P11D benefit.
It should also be also written into trust, so the benefit goes to the employee’s loved ones tax-free.
That means neither employer nor employees usually have to pay additional tax on Group Income Protection premiums. However, HMRC will tax the benefit on a claim via the PAYE system just like wages.
HMRC usually allows Group Critical Illness Cover as a business expense for employers. However, employees must pay tax on the premiums their employer pays on their behalf.
This is certainly not an exhaustive list of employee benefits you can provide and their tax position.
If you need help considering your options when it comes to setting up a competitive employee benefits package pop us a call on 02074425880 or email firstname.lastname@example.org.