Category: Employee Benefits

Taxable company benefits

As an employee, you pay tax on certain company benefits, such as cars, accommodation, and loans. Your employer calculates the tax you owe and deducts it through Pay As You Earn (PAYE). The amount of tax depends on the type and value of the benefit.

Some company benefits are tax-free, including childcare support and meals provided in canteens. Cash payments, however, are treated as earnings and are always subject to tax and National Insurance contributions.

Other taxable benefits you will pay tax on include the following:

Medical Insurance

You usually pay tax on the cost of the insurance premiums if your employer pays for your medical insurance. However, some health benefits are tax-free, including medical insurance while you are working abroad and annual check-ups.

Loans

You may have to pay tax on low-interest or interest-free loans from your employer if the loan is more than £10,000. The tax is calculated on the difference between the interest rate you pay and the official rate of interest set by the Bank of England. You could also be liable for tax if your employer lends money to one of your relatives.

Living Accommodation

If you (or one of your relatives) lives in accommodation provided by your employer, you may need to pay tax. The calculation depends on whether the accommodation costs are more than £75,000. You might not have to pay tax if the accommodation is provided so you can perform your job or do it more effectively, for example, agricultural workers living on farms.

Taxable benefits for use of company car

The tax you pay on the use of a company car depends largely on its CO2 emissions, so choosing a lower emission or electric vehicle can make a significant difference to your overall tax cost.

The benefits in kind (BIK) tax on company cars can be quite significant, with taxable rates ranging from 3% to 37% of the car’s list price when new. The rate depends on various factors, primarily the car’s CO2 emissions and fuel type. For instance, a petrol fuelled car emitting 155 g/km of CO2 or more would be taxed at the highest rate of 37% of its original list price. In contrast, an electric car with a range of 130 miles or more could benefit from the lowest rate of just 3%, significantly reducing the taxable benefit.

This creates a strong incentive for those driving company cars to switch to electric vehicles, as they would experience a noticeable reduction in their tax liability. This shift not only benefits the employees but also employers, who will see a decrease in Class 1A National Insurance contributions. These contributions are based on the total value of benefits provided in a tax year, so switching to electric vehicles helps lower overall costs for the employer.

Diesel cars attract an additional 4% supplement if they do not meet the Real Driving Emissions 2 (RDE2) standard. However, the supplement is removed entirely for diesel vehicles that are RDE2 compliant. The maximum BIK rate, including any diesel supplement, remains capped at 37%.

The taxable benefit is typically calculated based on the car’s manufacturer’s list price, which includes VAT, delivery charges, and number plates. The price considered is the list price on the day before the car is first registered. Any additional accessories fitted to the car also increase the taxable value. There are some exceptions. Employees can also reduce the list price by up to £5,000 if they make a capital contribution towards the cost of the vehicle. Special rules apply to classic cars, which have their own method for calculating the list price.

Using your own car for work purposes

Using your own car or bike for work travel? You may be able to claim tax relief for business mileage.

If you are employed and spend your own money on items needed for your job, you may be eligible to claim tax relief on those expenses. However, you can usually only claim tax relief on items that are exclusively used for work purposes.

For example, you might be able to claim tax relief when using your own vehicle, whether it is a car, van, motorcycle or bicycle, for work-related travel. Generally, travel between home and your regular place of work does not qualify. However, if you travel to a temporary workplace or incur business mileage, tax relief is typically allowed.

Employers often reimburse mileage using a set rate per mile depending on the type of vehicle. HMRC publishes approved mileage rates that apply when employees use their own vehicles for business journeys. If your employer uses these rates, the reimbursement is not treated as a taxable benefit.

If you are reimbursed at a rate below the HMRC approved amount, you can claim tax relief on the difference through Mileage Allowance Relief. For cars, the rate is 45p per mile for the first 10,000 miles and 25p per mile thereafter. The rate is 20p per mile for bicycles and 24p per mile for motorcycles.

Additionally, there is a passenger payment of 5p per mile per colleague if you transport other employees during business journeys in a car or van.

Claim for a business journey in a private vehicle

Use your own vehicle for work? You could be entitled to a tax-free mileage allowance. Make sure you are not missing out on HMRC-approved rates.

If you use your own car, van, motorcycle, or bicycle for business journeys, you may be entitled to a tax-free mileage allowance from your employer. This is known as a Mileage Allowance Payment (MAP) and is designed to cover the costs of using a personal vehicle for work-related travel. Many employees routinely claim this allowance when driving their own vehicle to visit clients, travel between temporary work locations, or attend off-site meetings.

It’s important to understand that MAPs do not apply to ordinary commuting, that is, travelling to and from your regular place of work. However, where travel is genuinely work-related and qualifies as a business journey, the allowance can be a valuable tax-free benefit.

Employers typically reimburse employees using HMRC’s approved mileage rates, which are designed to reflect reasonable running costs. These rates are as follows:

• Cars and vans:
  • 45p per mile for the first 10,000 business miles in a tax year
  • 25p per mile for each mile over 10,000
• Motorcycles: 24p per mile
• Bicycles: 20p per mile

Where an employee carries a colleague as a passenger during a business journey, an additional 5p per mile per passenger can be claimed provided the journey is for business purposes. This extra allowance is also tax-free when paid by the employer.

If an employer pays less than the approved HMRC rates (excluding the passenger allowance), you may be able to claim the shortfall from HMRC utilising Mileage Allowance Relief.

Repay private fuel provided for company cars

Employees using company fuel for private journeys can sidestep a hefty benefit charge by repaying the full private fuel cost to their employer by 6 July 2025. Miss the deadline, and tax becomes unavoidable.

This repayment process is known as "making good," and requires the employee to repay the employer for private fuel no later than 6 July following the end of the tax year. For the 2024–25 tax year, the repayment must be completed by 6 July 2025.

If the repayment is not made by the deadline, the employee becomes liable for the car fuel benefit charge. This charge is calculated based on the vehicle’s CO2 emissions and the car fuel benefit multiplier. The charge applies regardless of the actual amount of private fuel used, making it potentially costly for employees who only use a small amount of fuel for private journeys, such as commuting.

To avoid the tax, the employee must fully repay the employer for all private fuel used during the year, including fuel used to travel to and from work. Accurate record-keeping is essential, as HMRC will only accept that no benefit has arisen if the full cost is repaid by the deadline. In many cases, repaying the private fuel cost can be more financially beneficial than paying the fuel benefit charge.

Tax and employee suggestion schemes

Have you set up a suggestion scheme for ideas that could save or earn you money? Employee suggestion schemes can offer up to £5,000 tax-free for valuable input — and even £25 for smaller efforts. A win for innovation and your employee payslip!

An employee suggestion scheme can offer many advantages for businesses, not only in terms of the valuable insights and innovations employees contribute but also through the potential for significant tax-free rewards. These schemes can help businesses save money, drive new business, and foster a culture of continuous improvement, all the while offering employees incentives for their contributions.

HMRC outlines two types of awards that businesses can offer employees under such schemes:

1. Encouragement Awards – These are given for good suggestions or to reward employees for special efforts. Encouragement awards are exempt from both tax and National Insurance contributions up to a limit of £25. Any amount paid above £25 will need to be processed through the payroll and taxed accordingly.
2. Financial Benefit Awards – These are offered for suggestions that have the potential to save or generate money for the business. The financial benefit awards are exempt from tax up to a generous cap of £5,000. The exempt amount is determined by the greater of:
   • 50% of the money you expect the suggestion to save or generate for your business in the year following its implementation.
   • 10% of the money you expect the suggestion to save or generate for your business over the first five years after its implementation.

In addition to these conditions, there are other reasonable criteria that must be met for the payments to be considered tax-free. These criteria are designed to ensure that the awards are made in a structured and transparent manner.

Still time to repay private fuel costs and avoid tax charge

Use a company car for personal trips? Avoid a hefty tax charge by reimbursing your employer for private fuel by 6 July 2025. It’s called “making good” – and it could save you a chunk in tax if your private mileage is low.

To avoid the car fuel benefit charge, an employee must "make good" the cost of all fuel used for private journeys no later than 6 July following the end of the relevant tax year. This means that the employee needs to reimburse the employer for any private fuel used during the 2024-25 tax year by this deadline to prevent any tax liabilities related to the fuel benefit.

When an employee is provided with fuel for private use in a company car, the default rule is that the employee is required to pay the car fuel benefit charge. This charge is calculated based on the car's CO2 emissions rating and is applied to the car fuel benefit multiplier. This has just increased to £28,200 for 2025-26 (2024-25: £27,800).

However, the car fuel benefit charge can be avoided if the employee repays the employer for all private fuel, a process known as "making good." Private fuel use includes fuel used for commuting to and from work.

By making good, HMRC will accept that no car fuel benefit charge applies, allowing the employee to avoid the income tax charge on private car fuel. Typically, it is more beneficial for an employee to reimburse the employer for the private fuel rather than pay the Income Tax charge, especially if private mileage is low.

If the employee does not demonstrate that they have repaid all fuel costs associated with private journeys (including commuting), the car fuel benefit charge will still apply. Therefore, it is crucial for employees to maintain accurate records of private mileage and ensure that all fuel costs for private use are fully repaid by the deadline to avoid unnecessary tax charges.

Make the most of trivial benefit payments 2025-26

Small gifts can mean big tax savings! Use the trivial benefits exemption in 2025–26 to reward employees with non-cash perks under £50 – no PAYE, no P11D, and no NIC. A smart, simple way to say thanks.

The rules providing trivial benefit payments provide a great opportunity to give small rewards and incentives to employees in the new 2025-26 tax year. The benefit-in-kind (BiK) trivial exemption applies to small non-cash benefits like a bottle of wine, or a bouquet of flowers given occasionally to employees or any other BiK classed as 'trivial' that falls within the exemption.

By taking advantage of the exemption employers can simplify the treatment of BiKs whilst at the same time offering a tax efficient way to give small gifts to employees. The employer also benefits as the trivial benefit payments do not have to be included on PAYE settlement agreements or disclosed on P11D forms. There is also a matching exemption from Class 1A National Insurance contributions.

The tax exemption applies to trivial BiKs where the BiK:

• is not cash or a cash-voucher; and
• costs £50 or less; and
• is not provided as part of a salary sacrifice or other contractual arrangement; and
• is not provided in recognition of services performed by the employee as part of their employment, or in anticipation of such services.

The rules also allow directors or other office-holders of close companies and their families to benefit from an annual cap of £300. The £50 limit remains for each gift but could allow for up to £300 of non-cash benefits to be withdrawn per director or shareholder per year. The £300 cap doesn’t apply to employees. If the £50 limit is exceeded for any gift, the full value of the benefit will be taxable.

What is a salary sacrifice?

A salary sacrifice scheme lets employees swap cash salary for non-cash benefits, saving tax and National Insurance. But earnings must not fall below the National Minimum Wage, and life events may impact eligibility. Learn how to navigate these rules.

If an employee wants to join or leave a salary sacrifice arrangement, the employer must update their contract to clearly reflect the changes in cash and non-cash entitlements. Additionally, significant life events—such as marriage, divorce, a partner's redundancy, or pregnancy—may require adjustments to the arrangement, providing employees the option to opt in or out.

Certain benefits are currently exempt from Income Tax or National Insurance contributions and do not need to be reported to HMRC. These include:

• Contributions to pension schemes
• Employer-provided pension advice
• Workplace nurseries
• Childcare vouchers and employer-provided childcare contracted before 4 October 2018
• Bicycles and cycling safety equipment (including cycle to work schemes)

In some cases, for example, when a salary is exchanged for an employer contribution to a pension scheme, the reduction in salary may also reduce the employer's National Insurance contributions liability.

Check or update company car tax details

If you use a company car for private travel, it's taxed as a Benefit in Kind (BIK). The tax rate depends on the car’s list price and CO2 emissions—low-emission vehicles get tax breaks. Use HMRC’s online tool to check and update your company car tax details.

If you are provided with a company car that has private use (including commuting), it is considered a "benefit in kind" (BIK) and is subject to taxation. This means that the employee or director using the car must pay tax on the value of the benefit they receive from the car’s private use.

The amount of tax payable is based on the car’s list price, including optional extras and VAT. It also takes into account the CO2 emissions of the car, as cars with lower emissions usually have a lower benefit-in-kind (BIK) tax rate. The more polluting the car, the higher the tax rate will be, and conversely electric and low-emission cars are taxed more favourably.

HMRC’s ‘Check or update your company car tax’ service can be used to:

• check your company car’s details
• tell HMRC about any changes to your car since 6 April
• update your fuel benefit, if your employer pays for fuel

In order to use this service, you will need to know:

• the car’s list price (including VAT and accessories)
• to check if your diesel car meets Euro 6d standard
• CO2 emissions information
• the zero emission mileage figure or ‘electric range’ – if your hybrid car has a CO2 emission figure of 1 to 50g/km

The service is not available if:

• you’re part of a car averaging or car sharing scheme
• your employer is managing benefits and expenses through the company payroll (known as ‘payrolling’)
• you want to make updates for a company commercial vehicle, such as a van