What are employee benefits & tax implications?

Understanding employee benefits can be complex, particularly when it comes to knowing which perks are subject to taxation. Below, we take a look into the common benefits you can expect from a place of work, such as company cars, health insurance, and more, alongside their tax implications. This is essential in making better choices for your business or new job and confidently adhering to tax regulations.

What are employee benefits? 

In the UK, employee benefits are the extra perks employers offer beyond just salary. These range from pension plans and health insurance to paid time off and flexible working arrangements. All reflecting an employer’s dedication to supporting their workforce beyond financial remuneration. By providing these benefits, employers demonstrate their recognition of employees as valued contributors and partners in the company’s success, cultivating a culture of appreciation, loyalty and mutual respect. Not only this, but these perks contribute to a positive work environment, where employees feel valued, motivated, and empowered to perform at their best.

Examples of employee benefits?

You can expect to receive some or all of the following benefits when you become an employee in the UK:

Health insurance

It’s become customary for companies to include private health insurance as part of their compensation packages. This benefit not only provides access to top-tier healthcare but also boasts numerous advantages. For businesses, it can reduce absenteeism and boost productivity, while employees enjoy shorter waiting times, out-of-hours appointments, and personalised care. Additionally, some companies even extend this offer to families as an added bonus.

Life insurance

Life insurance is a valuable employee benefit that offers financial protection to employees’ families in case of an employee’s death. It provides peace of mind knowing that loved ones will be supported financially during difficult times. This benefit can cover funeral expenses, outstanding debts, and mortgage payments, and provide ongoing financial stability for dependents, making sure their wellbeing is safeguarded.

Company vehicles 

Company vehicles are more than just a perk—they’re a practical asset that streamlines work-related travel for employees. Having a company car means employees can attend meetings, visit clients, and perform other business-related tasks without worrying about the reliability and wear and tear on their personal vehicles. This not only saves employees time and money but also reflects positively on the company’s commitment to supporting its workforce. 

Goods and services

Offering access to discounted goods and services is a valuable employee benefit that enhances the overall well-being and satisfaction of employees. It provides them with opportunities to save money on everyday purchases and enjoy perks that contribute to a positive work-life balance. Whether it’s discounts on company products or access to on-site amenities like gyms or cafes, these benefits enhance employees’ quality of life and create a sense of appreciation and loyalty towards the employer. 

Professional Fees (membership fees)

Covering professional fees or membership dues for employees is a beneficial employee perk that supports their ongoing growth and development. By sponsoring their membership in industry-related organisations or associations, employers provide opportunities for networking, learning and skill enhancement. This investment in employees’ professional advancement not only benefits the individual but also strengthens the company’s talent pool and industry reputation. 

Are employee benefits taxable?

The tax treatment of employee benefits depends on several factors outlined by HM Revenue & Customs (HMRC). Generally, most employee benefits are subject to tax and National Insurance contributions (NICs) unless they are specifically exempt. Common taxable benefits include company cars, private medical insurance, and certain types of loans. 

However, some benefits are exempt from tax and NICs, such as workplace pensions, certain childcare schemes, and reimbursed business expenses. 

Employers must report taxable benefits to HMRC on annual tax returns and may need to operate PAYE (Pay As You Earn) on the value of benefits provided to employees.

Tax-exempt employee benefits

Sometimes, employment benefits and expenses are exempt from tax or National Insurance contributions (NIC) due to specific legal provisions or a PAYE settlement agreement (PSA). 

Under a PSA, the employer settles income tax and NIC on certain benefits and expenses on behalf of the employee, exempting them from tax reporting. Similarly, benefits covered by concessions or exemptions do not incur tax or NIC and don’t need to be reported on tax returns. These typically include child care vouchers, trivial benefits, annual events, cycle to work and car parking. 

Previously, employers commonly offered salary sacrifice arrangements, allowing employees to exchange taxable pay for tax-exempt benefits.

Taxable employee benefits 

The guidelines generally determine that the taxable value of a benefit is its ‘cash equivalent,’ typically the employer’s cost minus any employee contribution. Exceptions include private medical insurance, gym memberships, company cars, accommodations, and loans over £10,000, which carry tax implications. 

If you’ve received the benefit through a salary sacrifice scheme, your tax may be based on the salary you’ve given up under Optional Remuneration Arrangements (OpRA).

What tax implications can employee benefits have?

Employee benefits can carry various tax implications for both employers and employees. They are often reported through the P11D process, where the cash equivalent of certain benefits is declared to HM Revenue and Customs (HMRC). 

However, some benefits can be payrolled, meaning they are taxed through the payroll system in real time. 

Employers must also adhere to reporting deadlines for submitting P11D forms and paying any Class 1A National Insurance Contributions (NICs) owed on taxable benefits. Changes coming in April 2026 will require reporting of all taxable benefits via payroll services, impacting cash flows and planning.

Class 1A NICs are due on taxable benefits provided to employees and have specific payment deadlines, typically in July following the tax year. Employers should also register for the PBIK (Payrolling of Benefits in Kind) system if this applies to them.

Alternatively, employers can enter into a PAYE Settlement Agreement (PSA) to settle the tax and NICs on certain taxable benefits and expenses on behalf of employees, simplifying tax administration.

Additionally, Class 1B NICs are paid by employers who enter into a PSA, with deadlines typically in October following the tax year.

Do employers have to offer employee benefits? 

Employers in the UK are not legally obligated to offer employee benefits, but many choose to do so as part of their recruitment and retention strategies. By providing benefits such as pensions, health insurance, paid time off, and flexible working arrangements, employers can attract top talent and retain skilled employees. 

Offering these perks demonstrates a commitment to employee wellbeing and can contribute to a positive workplace culture. Additionally, benefits packages that prioritise employee health and work-life balance can improve morale, productivity, and job satisfaction, ultimately benefiting the organisation as a whole. It can also help them to remain competitive in the job market and position themselves as employers of choice in their industry. 

Get in Touch

Knowing which benefits are taxable can be confusing, and understanding these tax implications and compliance requirements is crucial for employers to avoid penalties and ensure their tax administration is smooth. Contact our tax advisors today for expert advice on what’s taxable and why it matters for your business.

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