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Q: How are the tax and NICs liabilities on the provision of employment benefits handled? Does it make any difference if the employer pays the employee’s own private bills?
A: There are many different ways of providing the same benefit, but the tax and NICs liabilities are not always the same. For this reason, some of the ways of providing benefits should generally be avoided.
There are at least eleven distinct ways of providing a particular employment benefit. The following notes explain the general principles that apply in each case and the P11D reporting requirements. It must be understood, however, that these are general principles and they do not necessarily apply where the tax legislation provides alternative ways of valuing and reporting a particular benefit, or provides an exemption from a tax and/or NICs charge.
In the following notes, a “lower-paid employee” is an employee whose earnings rate in a tax year is less than £8,500, including the value of any benefits provided. Any taxable benefits for lower-paid employees are reported on form P9D. Unless otherwise stated, a benefit provided for a lower-paid employee is only taxable if it is “money’s worth”, i.e. the employee is able to convert the benefit into money. There are no Class 1A NICs liabilities for any benefits reported on form P9D.
1. The employer provides the benefit under a contract between the employer and the provider
Where an employer provides a benefit to an employee under a contract between the employer and the provider, the cost to the employer, less any contribution from the employee, is reported on form P11D for each employee and the employer pays Class 1A NICs. Most benefits provided in this way are reported on the first of the two reporting lines in Section M Other items, although:
- private medical treatment and insurance are reported in Section I Private medical treatment or insurance, and
- relocation benefits that exceed the statutory limit are reported in Section J Qualifying relocation expenses payments and benefits.
Where company cars and vans are leased by the employer, they are reported in Section F Cars and car fuel and Section G Vans, as appropriate, but there are special rules for calculating the charges. The employer pays Class 1A NICs on the reported value(s).
Where the benefit is the provision of living accommodation in rented property, there are special rules for calculating the taxable value and the benefit is reported:
- on form P11D, in Section D Living Accommodation, or
- in the case of lower-paid employees, on form P9D, in section C Accommodation.
2. The employer provides the benefit by making an asset available for the employee’s use
Where an asset belonging to the employer’s business, e.g. a motorcycle or digital camera, is made available completely or partly for the employee’s private use, the “annual value” of the asset is reported on form P11D, in Section L Assets placed at the employee’s disposal, and the employer pays Class 1A NICs. An asset’s “annual value” is 20% of the market value of the asset when it was first provided as a benefit, plus any further costs incurred by the employer.
Where company cars and vans have been purchased by the employer and are therefore assets of the business, they are reported in Section F Cars and car fuel and Section G Vans, as appropriate, but there are special rules for calculating the charges. The employer pays Class 1A NICs on the reported value.
Where the benefit is the provision of living accommodation in company property, there are special rules for calculating the taxable value and the benefit is reported:
- on form P11D, in Section D Living Accommodation, or
- in the case of lower-paid employees, on form P9D, in section C Accommodation.
3. The employer provides the benefit by transferring a business asset to the employee
Where an asset belonging to the employer’s business, e.g. a car, or an item of equipment that is no longer required, is given or sold to an employee, the current market value of the asset, less any contribution from the employee, is reported on form P11D, in Section A Assets transferred (cars, property, goods and other assets), and the employer pays Class 1A NICs. If the asset had been reported as a benefit in Section L (see above) prior to the transfer, the reportable value is the asset’s original market value, less the amounts reported in Section L since that time.
4. The employee obtains the benefit under a contract between the employee and the provider, and the employer pays the bill
Where an employee contracts with the provider of a benefit, e.g. with a hospital to obtain private medical treatment or a retailer to obtain an incentive award, and the employer subsequently settles the employee’s bill directly with the provider, the benefit is reported on form P11D and both employer and employee pay Class 1 NICs through the payroll. The amount paid by the employer is added to the employee’s gross pay in the earnings period in which the payment was made, but for NICs purposes only. This method of providing a benefit has the disadvantage of creating a liability for Class 1 NICs that would not exist if the employer were to contract for the benefit.
Payment of an employee’s personal liabilities are reported on form P11D, in:
- Section B Payment made on behalf of the employee, where the payment is in settlement of the employee’s personal debts, e.g. payment of the employee’s telephone bill, rent, credit card bill, etc., or
- Section M Other items, on the second of the two reporting lines, where the employer’s intention is to provide a benefit but, in practice, the employee obtains the benefit and the employer pays the bill.
In practice, it does not matter whether the amount of the payment is reported in Section B or M; the effect is the same.
In the case of lower-paid employees, the payment is reported on form P9D, in Section A(2) Any other payments or benefits.
5. The employee obtains the benefit under a contract between the employee and the provider, the employee pays the bill and the employer reimburses the employee
Where the employee contracts with the provider of a benefit, pays the bill, and the employer subsequently reimburses the employee, the payment is earnings from the employment, not a benefit in kind. The payment cannot be paid as an expenses payment to the employee, nor is it reportable on form P11D or P9D. Instead, for both employees and lower-paid employees, it is paid through the payroll and is subject to both PAYE tax and Class 1 NICs. In order to increase the employee’s net pay by the amount of the reimbursement, the payment must be grossed up for tax and NICs before it is paid.
This is a very expensive way of providing a benefit and should generally be avoided. The grossing up of the payment is similar to the procedures for PAYE Settlement Agreements, where the employer pays the tax and NICs instead of the employee.
6. The employer buys a voucher and gives it to the employee to use to obtain the benefit
Where an employer gives a non-cash voucher to an employee to use to obtain a benefit, e.g. an incentive award or an eyesight test, the cost to the employer of providing the voucher is reported on form P11D or P9D and both employer and employee pay Class 1 NICs through the payroll. The cost of providing the voucher is added to the employee’s gross pay in the earnings period in which the payment was made, but for NICs purposes only.
The entries are made,
- on form P11D, in Section C Vouchers or credit cards, or
- in the case of lower-paid employees, on form P9D, in section B Vouchers and credit cards.
7. The employee uses the employer’s credit card to pay for the benefit, in circumstances where the contract is between the employer and the provider
Where an employee obtains a benefit, e.g. an incentive award or fuel, pays for it using the employer’s credit card or fuel card, and the employee makes it clear to the provider at the point of sale that the purchase is made under a contract with the employer, the benefit has been provided by the employer under a contract between the employer and the provider. See situation 1, above.
8. The employee uses the employer’s credit card to pay for the benefit, in circumstances where the contract is between the employee and the provider
Where an employee obtains a benefit, e.g. an incentive award or fuel, pays for it using the employer’s credit card or fuel card, and the employee does not make it clear to the provider at the point of sale that the purchase is made under a contract with the employer, the benefit has been provided by the employer under a contract between the employee and the provider. This is the same as situation 4, above, but the benefit is reported:
- on form P11D, in Section C Vouchers or credit cards, or
- in the case of lower-paid employees, on form P9D, in section B Vouchers and credit cards.
9. The employer provides the employee with a cheap loan
Where an employer provides a loan to an employee at an interest rate that is less than the Inland Revenue official interest rate, the reportable value, effectively the difference between the interest that is actually charged on the loan and the interest that would be charged if the official rate were used instead, is reported on form P11D in Section H Interest-free and low interest loans, and the employer pays Class 1A NICs.
10. The employee may make use of a service that the employer provides to others
Where an employee is provided with a service that the employer provides to others, e.g. the employer is a private hospital and the employee is provided with treatment there, the marginal additional expense incurred by the employer, i.e. the expense that would have been saved if the employer had not provided the benefit, is reported on form P11D in Section K Services supplied.
11. The employee may choose between receiving a benefit and a cash alternative
Where an employee has the option of receiving cash instead of a benefit, the benefit is:
- reported in the appropriate section of form P11D if the benefit is chosen, or
- subjected to PAYE tax and Class 1 NICs if the cash alternative is taken.
The amount reported on form P11D is the higher of (1) the reportable value of the benefit, and (2) the amount of the cash alternative. However, in the case of company cars, or company vans from 6 April 2005, the reportable value is used if the benefit is chosen, even if the cash alternative is higher.
If lower-paid employees are given a cash option, the benefit is always reportable on form P9D, even though it would not be reportable if there were no cash option. The benefit is now “money’s worth” and, if the benefit is taken, the amount of the cash alternative is reported in Section A(2) Any other payments of benefits. If the cash alternative is chosen, the payments are subject to PAYE tax and Class 1 NICs through the payroll.
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