What are Benefits in Kind?
Definition: Benefits in kind are defined as different types of non-cash benefits of monetary value that employers offer to their employees. It may incorporate different kinds of benefits like private healthcare, interest-free loan, a gym membership, mobile phone, accommodation, a company car, travel expenses, and so forth.
Benefits in kind are all the non-cash benefits that you may receive over and above your salary from your employer. These are often referred to as notional pay, fringe benefits, or perks. Rewarding the employees using benefits in kind is considered a common practice that companies follow worldwide to motivate and retain their staff. These perks can have a value equal to 30-40% of the total reward package.
The compensation package that an employee receives constitutes a salary and a whole set of benefits in kind, which can be in the form of an asset or a service. When the employee can use the received benefit personally and not for business, then that benefit can be termed as a fringe benefit or benefit in kind.
Salary being a cash benefit is subject to taxation; however, the tax system may treat the benefits in kind differently. Some of these perks are taxed depending on the earnings, and the employer must include them in the tax return, while others are non-taxable.
The entire array of benefits carries a financial value and must be reported to the taxman to ensure that the employees get everything they deserve. The benefits in the case of a self-employed person may get used in the business and be disclosed in the tax return.
Examples of Common Benefits in Kind
Employees receive an extensive range of benefits in kind, and some of them are as follows:
- Health or life insurance
- Company car
- Assets for personal use
- Traveling expenses
- Non-business-related entertainment expenses
- Personal entertainment expenses
Sometimes, several rules and regulations need to be factored in before deciding whether to tax a benefit or not. Some nontaxable benefits in kind for which they are will be not any need to pay tax are:
Some of the examples of tax-free benefits in kind are-
- Reasonable canteen meals
- Work-related travel cost
- Payments to a pension
- Work-related training cost
- Work-related safety clothes
- Personal gifts not connected to the job (not including cash)
- Other business expenses
Before negotiating a contract, all the tax laws should be considered, especially in international assignments, as the policy of the host country regarding benefits in kind may be considerably different.
Types of Benefits in Kind
Different types of benefits in kind are majorly associated with employee benefits. However, the benefits in kinds offered to the employees depend on their work profile and designation. Some of the examples are discussed below:
The housing expenses have a deterrent effect on an employee’s salary. The company providing an allowance of housing costs can make a huge difference. Nowadays, most of the potential employees prefer opting for the companies providing accommodation options.
All these employee benefits contribute to decreasing expenses. Hence an employee can use that expense as a saving now. Even if the accommodation expense is deducted from the salary, it lowers an employee’s tax bracket. Many countries give accommodation benefits directly related to the economic benefits and can be qualified as tax compensation.
2. Meal plan
Almost most of the companies cover the meal cost of their employees. This is only applicable when the employees are in their respective workplaces. The company also covers meal expenses that are related to business travel or meeting. Value of the benefit of this kind is useful in telling the employees that you value their health and well-being.
3. Car Allowance
This is one of the most controversial benefits in kind. Car or other company vehicles are given to conduct company-related work rather than personal use. But this benefit is most likely to be susceptible to abuse.
3. Medical Benefits
Some of the company extends medical insurance or benefits to the employees. It is generally included in the benefits-in-kind package. Expenses on health insurance and life insurance policies are paid directly by the company. Hence the employees are exempted from paying tax on these.
4. Relocation Expenses
There are times when multinational companies relocate the employees due to the nature of the work. Due to the Benefits in kind, the company covers the cost associated with moving and relocating the employees to the new location.
Tax Policy Towards Taxable Benefit in Kind
The rules surrounding the benefits in kind may be different across the world, but there are certain similarities in the perks subject to taxation. The tax policy in the UK is such that it does not tax the income if it is less than the personal allowance on the income tax return.
The employer must disclose everything regarding the fringe benefits to the HMRC – either by including them in the payroll or on the P11D forms – and pay National Insurance contributions. Moreover, some employees get offered a ‘flex scheme’ incorporating flexible benefits, which allows them to trade their pre-tax wage for the benefit and thereby escape the tax burden.
There are cases where housing allowances or the use of a company car for business will not be taxed. Generally, child-care expenses, pension contributions until withdrawal, and moving expenses are not taxed.
Examples of Most Valuable Benefits in Kind BIK
An example of such benefits in kind items could be housing and transportation, whose value can balance regular living expenses without being subject to taxation, just like tax-free salary compensation.
Similarly, shares or options, which are generally taxed, could ensure lucrative gains depending on the rise in the market. The most valuable benefits for an employee working on an overseas assignment would include repatriation expenses, work visa cost, housing allowance, education expenses, healthcare expenses, etc.
Methods to Calculate different Types of BIK
There are several ways one could calculate the BIK. Some of them are discussed below:
1. Home country method
This method is ideal for short assignments or changes like payroll and minor expenses. The disadvantage of the home country method is that the difference in the host country’s tax or currency difference can affect the overall figure.
2. Localized method
The localized method is applied to the long-term assignment or changes, for instance, in other countries, accommodation and food allowance and pensions. More extended will be the assignment; more will be the payroll and expenses paid by the host counties.
3. Global method
The employees who are transferred frequently from one country to another often complicate the payroll and benefits in kind. The frequent fluctuation in the number of fringe benefits can confuse. This approach provides a sense of continuity to the employees. The reason being this can cause the least disruption in financial management.
Value of the Benefits in Kind for Overseas Employees
The benefits in kind offered to overseas employees may not correspond with those offered to employees working on domestic assignments. This is primarily because of the expense and hardship that come along with the position when placed abroad. This is favorable for the following reasons:
- The risk associated with currency fluctuations gets mitigated.
- The tax-free BIK covers the living expenses, thus allowing the employees to save a large portion of their salary.
- Even when working on international assignments, the employees can maintain their principal residence in the domestic country.
However, the disadvantages can’t be ignored:
- At first, there is a risk related to currency when the allowances are considered in the home country’s currency.
- A reduced salary for some employees depending on the benefits in kind package.
- Depending on the rules, certain benefits in kind may be taxed no matter how important they are for the international assignment. This may result in the employee being double-taxed.
Why Employer should use BIK Consider for Employees
An employer may offer BIK to its employees to motivate them. It not only adds value in the form of monetary value but psychologically influences them to work with more enthusiasm, positivity, and constructiveness. By providing travel expenses, company cars, interest-free benefits, etc, employers can ensure better engagement for the employees. Some of the reasons why an employer should incorporate BIK strategies are-
At the time of recruitment, one of the reasons the applicants apply to one’s company for employment is how much employee-related benefit they will receive. Besides the growth opportunities, benefits in kind also serve as a significant consideration of joining any company.
2. Retaining the Employees
Benefits of kinds serve as a motivational factor for any employee. An employee expects several benefits from their company. For example, performance bonuses, health care plans, pensions, etc. All these benefits are reflecting the changing needs and lifestyle of employees. And are considered essential employees’ needs. Well-structured benefits will help the employees work in the same company for a longer period.
3. Boosting the Morale
Offering benefits in kind helps in improving employees’ experience at work. It helps to keep the employees motivated and boosts their morale. It helps in contributing to producing better results.
4. Tax benefits
Benefits of kinds provide tax benefits not only to the employees but also to the company. Following are some of the benefits that are exempted from tax;
- Life insurance
- Housing allowance
- Cafeteria plan on meals provided in the workplace
- Employees discount
Reporting Employee Benefits in Kind BIK
Benefits in kind should be reported on a P11D form. The P11D does not depend on the company’s financial year-end. The form has to be submitted following the end of the tax year. The contribution of benefits in kind is paid by the company and not the employees.
All this adds up to an increase in an individual’s salary. Before an employee submits their P11D form, a company also needs to file a P11D(b) form. The given form sums up the employees’ P11D form. It contains details such as how much National Insurance is to pay on the expenses and benefits the company provides.
It is a statutory requirement for all companies to have a proper system for proving the expenses claim of the employees. Hence the companies need to retain all the receipts and expense forms.
On the concluding note, it is clear that the benefits in kind are one of the common practices that companies use for compensating or rewarding their employees.
Companies opt for the BIK strategies for driving employee engagement and optimizing employee retention rates.
What are your thoughts about the importance of different types of benefits in kind in optimizing the performance of the employees? Share your opinion with us in the comment section below.