SMALL BUSINESS RESOURCES
Fringe benefits tax explained
5 min read
What are fringe benefits? As a business owner and employer, you may choose to provide your employees with what’s known as ‘fringe benefits’. You’ll need to both understand how to classify a fringe benefit and the tax implications they hold.
So, what are fringe benefits exactly and how do you manage the compliance of these employee incentives?
What are fringe benefits?
Fringe benefits are an added ‘bonus’ product or service that employers offer employees as a form of compensation in addition to their usual wages or salaries.
These employee benefits can be manifested in a variety of ways and are often used as an incentive when hiring key talent, as well as to reward productivity or build company culture.
As an example, some of the most common fringe benefits include:
- personal bills
If you’re unsure if you’re providing your employee a fringe benefit or not, please review this complete list of fringe benefits.
It’s your responsibility as an employer to be fully aware of the classification of any potential fringe benefit and then act appropriately when it comes to taxation, PAYE and compliance with the rules set forward by the HMRC.
Do you pay tax on fringe benefits?
Do your employees need to pay tax on the fringe benefits they receive? Yes, your employees will certainly need to pay tax on any fringe benefits such as company cars, accommodation, and loans.
However, this tax is paid on their behalf by you, their employer. The mechanism which governs this is the very familiar PAYE (pay as you earn) system.
As an employer, it’s your responsibility to calculate and pay this fringe benefits tax on your employee’s behalf and keep records of all benefits that are awarded in addition to their remuneration, whether these specifically attract tax or not.
How are fringe benefits taxed?
So how exactly are fringe benefits taxed? As mentioned, the PAYE system will appropriately accommodate this taxation.
As an employer, you need to be aware of the following:
- Employees are generally taxed on what it costs to provide the benefit.
- Benefits are taxed at the employee’s regular tax rate.
- You should deduct and pay tax on most employee fringe benefits through your accounting software or payroll system.
How to calculate fringe benefits?
Most benefits are taxed based on the cost of the benefit itself. For example, if you provide insurance for your employee at the cost of £2,000, this is the amount that will be taxed. As mentioned, this is taxed at the employee’s normal tax rate, depending on their income bracket.
However, there are different rules depending on the type of benefit you offer. For example, company cars, mobiles and laptops have their own separate systems.
This is further complicated by benefits that are intended partly for work and partly for personal use, with the personal portion usually being the only part taxed as a fringe benefit.
Again, to be sure of the tax you should be paying, please consult the full list of fringe benefits to understand the rules associated with each category.
How to report fringe benefits tax
At the completion of every tax year, you’ll need to submit what’s known as a P11D form to the HMRC. This is done on behalf of every employee on your payroll that you’ve provided with fringe benefits.
You’ll also need to submit an additional P11D(b) form in order to inform the HMRC how much Class 1A National Insurance you’ll need to pay for the benefits you distributed.
To report upon your fringe benefits, you can choose one of the following methods:
- payroll or accounting software (recommended)
- HMRC’s PAYE online service
- HMRC’s Online EOY expenses and benefits service
It’s also important to note that you should be keeping records detailing these benefits, retaining receipts, and any necessary proof for a minimum of three years.
For example, if you compensated your employee with a free holiday, you’ll need to provide receipts and notes as to where they went and on what date.
What fringe benefits are not taxable?
There are certain fringe benefits that do not attract taxation, including meals. Keep this in mind and, if unsure, consult your accountant or make an inquiry with the HMRC.
Tax free benefits include but are not limited to:
- canteen and meals
- parking spaces
- reimbursement of moving costs if relocation is required, up to £8,000
- pension advice up to £500 per year
- small or ‘trivial’ benefits up to £50 per employee
As with any compliance concern, there are benefits to relying on your accountant or bookkeeper to help manage this fringe benefit tax responsibility on your behalf.
Calculating and reporting on fringe benefits is not necessarily a monumental task. However, there’s enough complexity and gravity that it’s best to allow compliance professionals to provide this service.