Do Company Benefits Also Get Taxed? How Benefit-in-Kind Tax Affects Employee Income and Corporate Tax Burden
- TBA
- Nov 19, 2025
- 4 min read
Many companies offer ‘non-cash benefits’ such as company cars, private medical insurance or gym memberships to attract and retain talent.
However, these perks also carry a tax cost: the Benefit-in-Kind (BiK) tax, which may have a greater impact on your take-home pay than you expect.
From the 2025 tax year, the Benefit-in-Kind regime will undergo several changes: higher tax rates for electric vehicles, reclassification of certain car models, and the upcoming introduction of the ‘payrolling’ system for real-time taxation of benefits.
Today, let’s look in detail at who pays Benefit-in-Kind tax, which benefits are taxable, and how to declare them legally and efficiently.
What Is Benefit-in-Kind (BiK)?
Benefit-in-Kind tax is levied by the UK government on ‘non-cash benefits’ provided by employers to employees.
In other words, any goods or services received as part of your employment but not paid in cash, such as a company car, private health insurance, employer-provided accommodation or gym membership, may be considered taxable benefits.
This tax category was formally introduced in 2002, initially to discourage companies from avoiding tax by providing high-emission vehicles, and to promote more environmentally friendly fleet policies.
Over time, it expanded to include other benefits, such as:
Company cars (for both personal and business use)
Private medical insurance
Gym memberships or other wellness schemes
Employer-provided accommodation
Mobile phones, travel expenses or work-related clothing
Although most ‘fringe benefits’ can be subject to BiK tax, some, such as the Cycle to Work scheme, are tax-exempt.
Always confirm the tax treatment of your benefits with your employer or a qualified accountant.
Who Pays Benefit-in-Kind Tax
While the benefits are provided by the employer and reported to HMRC, the actual tax liability rests with the employee. In other words, the employer reports the value of the benefits, but the employee pays the tax.
The Benefit-in-Kind amount appears separately on your payslip, clearly distinguished from regular salary income.
The corresponding tax is deducted automatically through the Pay As You Earn (PAYE) system, just like income tax. This means employees do not receive an additional tax bill—deductions are made directly from monthly pay.
Because Benefit-in-Kind increases your taxable income, it can push you into a higher tax bracket. If the value of your benefits causes your total income to exceed a threshold, the portion above it will be taxed at a higher rate.
For example:
If an employee earns £45,000 annually and receives a £6,000 benefit (e.g. a company car), their taxable income becomes £51,000. This pushes part of their income into the 40% bracket instead of being entirely taxed at 20%:
£12,570 tax-free
£12,571–£50,270 taxed at 20% → £37,700 × 20% = £7,540
£730 above £50,270 taxed at 40% → £730 × 40% = £292
Total annual income tax: £7,832
In this case, the £6,000 benefit increases the employee’s tax by around £1,346—an effective BiK rate of approximately 22.4%.
Employer Responsibilities
While BiK increases employees’ taxable income, employers also face additional compliance obligations.
Employers must pay Class 1A National Insurance on employees’ benefits, at a rate of 15%.
They are also required to file a P11D form annually, recording all benefits provided to staff.
Why Companies Still Offer Benefits Despite the Tax Burden
Although Benefit-in-Kind creates additional tax costs, many businesses continue to offer such benefits for several reasons:
Attracting and retaining talent
In the UK’s competitive job market, benefits packages often play a crucial role in attracting and retaining employees. Private health insurance, company electric vehicles and mental health programmes all contribute to overall job satisfaction beyond salary alone.
Tax efficiency and optimisation opportunities
While BiK is taxable, UK tax law provides reliefs and exemptions for certain benefits. With proper planning, companies can achieve a win–win outcome: lower tax costs and happier employees.
For instance, in 2025, the BiK rate for electric vehicles will be just 3%, much lower than the 25–37% rate for petrol cars. Employers offering EVs may also claim capital allowances, with some models qualifying for 100% first-year allowance (FYA).
Certain health checks, professional training, eye care and childcare support are classified as tax-exempt benefits, allowing employers to fully deduct their costs as business expenses.
Enhancing tax efficiency and corporate image
Providing HMRC-compliant benefits can help businesses manage taxable profits effectively and avoid the long-term tax burden of repeated pay rises.
At the same time, benefits like green vehicles and health initiatives can strengthen the company’s public image.
Some advice from TB Accountants
Benefit-in-Kind tax is not merely an ‘extra tax’ but a policy tool encouraging both employers and employees to adopt more sustainable and efficient behaviours.
Furthermore, HMRC plans to make the ‘Mandatory Payrolling of BiK’ effective from 6 April 2027.
Once implemented, most employee benefits will no longer be reported via the annual P11D form but will instead be taxed automatically through payroll in real time.
For further advice, arrange a consultation with our team.
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