Benefits in Kind (BiKs), also known as fringe benefits, are non-cash perks provided to employees, such as company cars or private health insurance. While they aren't part of the employee’s salary, they still carry a taxable value and must be reported to HMRC. Calculating tax on BiKs accurately is essential for payroll compliance and employee transparency.

What Are Taxable Benefits in Kind?

A taxable BiK is any benefit provided by an employer that has a monetary value and isn’t part of the employee’s salary. Common taxable benefits include:

Company cars or vans
Private medical insurance
Interest-free or low-interest loans
Living accommodation
Gym memberships
School fees are paid by the employer

How to Calculate Tax on Benefits in Kind

To calculate tax on a benefit in kind, follow these key steps:

1. Determine the Cash Equivalent Value

Each benefit has a specific method for calculating its value. For example:

Company cars: Calculated using the car’s list price, CO₂ emissions, and fuel type.
Private healthcare: Based on the cost paid by the employer.
Loans: Tax is due if the total loan value exceeds £10,000 and interest is below HMRC’s official rate.

HMRC provides detailed guidance and calculators for specific benefits.

2. Identify the Employee's Tax Rate

Tax is applied to the cash equivalent value of the benefit based on the employee’s marginal tax rate 20%, 40%, or 45% depending on income.

3. Calculate the Tax Due

Multiply the benefit’s value by the applicable tax rate. For example:

If the benefit is valued at £2,000 and the employee is in the 20% tax band, the tax due is:

£2,000 × 20% = £400

4. Decide How to Report It

You can either:

Include it in payroll (payrolling benefits) and deduct tax in real time
Report it on a P11D after the tax year and adjust the tax code for the next year

For many employers, payroll is a simpler and more transparent option.

Managing benefit taxation can be time-consuming and complex. That’s where Payroll Services Accountants come in, helping businesses accurately calculate and report BiKs while staying fully compliant with HMRC rules.

Common Mistakes to Avoid

Not using the correct method to calculate the benefit value
Forgetting to register for payrolling benefits with HMRC
Failing to report small but taxable perks
Mixing up grossed-up values with standard values

These errors can lead to HMRC penalties or unhappy employees due to unexpected tax bills.

Final Thoughts

Calculating tax on Benefits in Kind doesn’t have to be confusing. By understanding how each benefit is valued and ensuring correct payroll reporting, you can stay compliant and keep your payroll running smoothly.

A Guide to How to Calculate Tax on Benefits in Kind (BiKs)