Directors often want to pay for benefits for themselves or employees via their Ltd company to reduce tax. The question is always are these expenses “wholly and exclusively” for business purposes? Employee benefits such as health insurance, gym memberships, or company cars can be paid for by the Ltd company, reducing corporation tax. However, they will incur a benefit-in-kind (BIK) charge as a result, which increases income tax for the employee and national insurance for the employer.
The total annual value of the BIK for each employee needs to be declared via the P11D process each year. The total value of the benefits are then multiplied by the employee’s individual tax rate to calculate their additional income tax. For example, an employee receiving a £360 annual gym membership and a £640 health insurance benefit would pay £200 extra tax if their total earnings fall within the 20% tax bracket (£360 + £640 = £1,000 * 20%). This increases to £400 if they’re a 40% tax payer, and so on. The additional tax owed is declared via the individual’s self-assessment tax return if they’re registered to file one, or by adjusting their tax code for PAYE if they don’t file a separate return.
The Ltd company will incur an additional Class 1A National Insurance equivalent to 15.05% (22/23 tax year) on the benefit value. Continuing with the £1,000 example above, this would be a £150.50 charge for the Ltd company.
There are a few exceptions to the BIK charge, such as eye tests or glasses required by health and safety legislation for employees who use a computer monitor for work. Individuals are also allowed one annual health check-up or screening.
The P11D process follows the tax year, 6th April to 5th April, and has to be submitted by the 6th July each year.
This article is designed as a brief introduction to the topic and everyone’s situation is always unique. If you have any questions or would like some advice on your own situation, please submit a message on the contact page (click here) and I will be happy to help.
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