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From 6 January 2024, the main rate of class 1 National Insurance contributions (NIC) deducted from employees’ wages is reduced from 12% to 10%. From 6 April 2024, the main rate of self-employed class 4 NIC will reduce from 9% to 8% and class 2 NIC will no longer be due. Those with profits below £6,725 a year can continue to pay class 2 NIC to keep their entitlement to certain state benefits. Our guidance will be updated in full in spring 2024.

Updated on 6 April 2023

Paying tax on employment benefits

On this page, we look at how you pay tax on benefits-in-kind, also known as non-cash benefits, as an employee.

Content on this page:

Introduction

If your employer provides you with a taxable benefit, such as use of a company car, the taxable benefit has to be valued. For most types of benefit-in-kind, the law sets out how you should work out the value. You pay tax on the taxable value of the benefit.

We describe how tax is calculated on our page Taxable benefits in kind.

You pay the tax on benefits in one of two ways, chosen by your employer:

  • the P11D method, or
  • the payrolling method.

Your employer may choose to use a mixture of the two ways for different benefits. We look at each method and what it means for employees below.

The P11D method

This is the method that was in use for all benefits before 6 April 2016 and continues unless your employer opts to use the ‘payrolling’ method (see below). If you receive taxable benefits, your employer gives you a form P11D by 6 July following the end of the tax year, for example, by 6 July 2024 for the tax year 2023/24. This summarises the type and value of the benefits that you have been provided with. The amount on the form P11D represents additional employment income and is taxable.

HMRC may try to collect the tax due on your taxable benefits through your tax code. If so, HMRC will amend your tax code to include the value of the taxable benefits. This adjustment for a taxable benefit will appear as a deduction from your tax allowances for the tax year and will mean that more tax is collected than would be the case on your wages or salary alone.

To understand more about this, see our page on PAYE coding notices.

When you are first provided with a benefit, there can be a time lag while HMRC process the relevant information. For example, HMRC are unlikely to be able to deal with benefits first provided to you in 2023/24 in your 2023/24 tax code unless you contact HMRC and let them know about the benefit. You are therefore likely to receive a P800 calculation showing an underpayment of tax for 2023/24, which HMRC will try to collect by adjusting your tax code during a later year. Alternatively, HMRC may issue you with a simple assessment and request the underpaid tax be paid in one lump sum.

If you are required to complete a tax return, you must include any P11D benefits on your tax return. Any tax due will normally be collected by 31 January following the end of the tax year.

Thereafter, HMRC try to include estimated amounts of benefit income in current year codes, so that they can try and collect the tax during the tax year in which you receive the benefit. In some instances where you receive benefits, you may find that your tax code is adjusted for a prior year underpayment and a current year estimated liability on benefits all at the same time.

It is therefore very important to check your coding notice to ensure that any benefits are being included properly and that any tax underpaid from an earlier year due to benefits is correctly shown.

Example: Dean

Dean is entitled to the basic personal allowance of £12,570 for 2023/24. He has the use of a company car throughout 2023/24, and the estimated taxable car benefit is £3,180. There are no other adjustments required to Dean’s PAYE code. His 2023/24 code is made up as follows:

  £
Total allowances and reliefs: personal allowance

12,570

Total deductions: value of taxable car benefit

-3,180

Total tax-free income allowed for 2023/24

9,390


The code of 939L tells Dean’s employer that Dean can only receive £9,390 of tax-free income in 2023/24. Note that if Dean had been a Scottish taxpayer his tax code would have had a prefix of ‘S’. If Dean had been a Welsh taxpayer his code would have had a prefix of ‘C’.

Dean will pay slightly more tax each month on his cash salary than he would have done had his tax code been 1257L – indicating the availability of the basic personal allowance of £12,570 – however at the end of the tax year when a full reconciliation (tax calculation) is performed, hopefully his tax liability on the car benefit will have been settled.

If Dean did not pay the tax through his PAYE code, he would have to settle the tax liability on the car benefit after the end of the tax year.

Alternatively, HMRC may ask Dean to complete a self assessment tax return, and he will have to pay the extra tax due on the benefits through self assessment.

The payrolling method

Your employer must tell you if this method is being used. Your employer calculates the value of the benefit being provided to you during the whole year and then collects the tax due on that benefit directly through the payroll. Before 1 June following the end of the tax year, so by 1 June 2024 for the tax year 2023/24, your employer must provide you with a statement showing the benefits that have had tax collected on them through the payroll.

Example: Steph

Steph is provided with a car by her employer during 2023/24 and the car benefit is expected to be £3,300 for the full tax year. Her employer advises both her and HMRC that they are going to payroll this benefit. Steph’s tax code should not show any restriction for the car benefit. She is entitled to the basic personal allowance and so should expect a tax code of 1257L. Note that if Steph were a Scottish taxpayer, her tax code would have a prefix of ‘S’. If she were a Welsh taxpayer, her tax code would have a prefix of ‘C’.

Each pay day her employer will add an amount to her salary to collect the tax due on her car benefit throughout the year. Steph is paid monthly so each month her employer will add £275 (£3,300 divided by 12) to the value of her cash salary before calculating the tax she has to pay that month. Note that Steph does not receive £275 per month extra in her pay, but she pays tax as if she had been paid an extra amount. That means that at the end of the tax year Steph will have paid tax on £3,300 in addition to the tax due on her salary and so will have paid the tax due on her car benefit through her payroll.

Your employer may not payroll all of your benefits so you may also receive a P11D for some of them. Employers cannot payroll living accommodation or interest free loans.

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