As with many other tax rules, those on the taxing of perks, fringe benefits and benefits in kind are less than simple. The principle, however, is: if you receive non-cash benefits such as a company car or medical insurance you may have to pay tax on them in addition to the tax you already pay on salary or benefits through PAYE.
This means that if your employer provides you with a car you’ll have to pay tax on the value of it as a benefit, according to the list price of the car, its CO2 emissions and the type of fuel it uses. If you pay something towards the cost of the vehicle or do not use it for the entire year, the value may be reduced accordingly. If your employer provides you with fuel for your private use you will also have to pay tax on that.
Also subject to tax will be any loans from your employer of more than £5,000 at low or no interest. In this case the difference between the interest you pay and the interest at the official rate is a benefit.
There are a number of benefits in kind which on which tax is not payable. These include contributions paid by the employer into an approved pension scheme; free or subsidised meals which are provided for all employees, the use of company-owned sports facilities, redundancy counselling, some childcare arrangements, subsidised commuting costs, bicycles provided for travel to work, meal voucher up to 15p a day, removal expenses if required for transfer up to £8,000 for each move and trivial personal gifts.
Both you and your employer are required to inform the Tax Office of any benefits you receive and these must be shown on your Self Assessment form. You are required to keep the details of benefits as reported by the employer for two years after the current tax year.
HMRC includes the value of benefits with any other income on which you have not been taxed and subtracts it from the total of your allowances and other reliefs to arrive at an adjusted personal allowance, the tax-free income you are entitled to in the current year.
More on salary sacrifice benefits
Many UK companies use the savings in tax and national insurance accrued through salary sacrifice benefits to fund flexibly benefits. In such a scheme an employee relinquishes part of the salary to which they are entitled in return for some form of non-cash benefit. The most common salary sacrifice benefits include childcare and pension payments. Because these are usually taxed at the normal tax rate, this may not be an advantage for the employee. They may also result in a reduction of benefits from the state because of reduced National Insurance contributions.
Tax on benefits is calculated as follows. Suppose you are entitled to the full Personal Allowance of £7,475 and your employer has provided you with £600 worth of private medical insurance. The value of the insurance is deducted from your Personal Allowance, leaving you with a net tax-free amount of £6,875.
In most cases you will receive a PAYE Coding Notice which explains how your benefit has been processed.