How Your Company Benefits Are Taxed

Do you receive benefits from your employer?

If you receive any perks from your company including a company car, interest free loan or private medical insurance then you may have to pay tax on them.  HM Revenue and Customs use the P11d form to determine the value of any such benefits and then collect the tax due on them through your tax code.

Our guide looks at how your company benefits are taxed.

How HMRC deals with company benefits on your P11d form

If you enjoy any company benefits and earn over £8,500 a year (including the value of any company benefits) then your employer is obliged to tell HMRC what the value of these benefits is.  They do this using a form called a P11d (an introduction to the P11d form is here).

HMRC then adds the cash value of your company benefits to any other untaxed income you have (savings income, income from a second job etc).  They then deduct the total amount of income that you have not paid tax on from the total value of your personal tax allowances and reliefs.

What is left is the amount of money you’re allowed to earn in a tax year without paying tax.

Here’s an example.

Your company provides you with private medical insurance as part of your salary package.  When your employer completes the P11d form they tell HMRC the cash value of this benefit is £1,000.

You are also entitled to the full tax-free Personal Allowance of £7,475 (2011/12 tax year).

HMRC take away the income that you have not paid tax on (the £1,000 private medical insurance) from your Personal Allowance (£7,475 minus £1,000 = £6,475).

This means that you can earn £6,475 this tax year before you start paying tax and your tax code is 647L.

You will normally receive a copy of your P11d form and HMRC also send you a ‘PAYE Coding Notice’ explaining exactly how they have dealt with the benefit in your tax code.

Common company benefits that you’ll pay tax on

Here are several common company benefits and how the tax is dealt with:

  • Medical insurance – you have to pay tax on the cash value of any private medical insurance your employer pays or provides for you.  HMRC deducts the value of this from your tax-free pay
  • Car benefit – you have to pay tax on the benefit of using an employer’s car for your private motoring.  The cash value of the benefit is worked out by HMRC and they consider the car’s fuel type, cost and CO2 emissions
  • Employee loan – if your employer lends you more than £5,000 you have to pay tax on the benefit of paying no interest or interest at less than the official interest rate.  HMRC work out the difference between the interest rate you pay and the ‘official rate’ and deduct the difference
  • Employer/other employer benefits – any other benefit you have to pay tax on not covered by the main HMRC categories