Why employment benefits could cost a lot more than you think.
A company car and private medical insurance can be very nice perks of the job, but have you ever thought how much they really cost you? Well, there’s no such thing as a free lunch. While these benefits are often paid for by your employer, they will have an impact on your pay packet too.
Unfortunately, non-cash perks -- or 'benefits-in-kind' as they are otherwise known -- are taxable. True to form, the revenue has to take its cut.
In simple terms, a cash equivalent is calculated for a particular benefit so that it can effectively be treated as extra salary. This amount is then added on top of your normal salary and charged at your highest rate of income tax.
In other words, if you’re already a higher rate taxpayer, your benefits will be taxable at 40%.
Thankfully, some benefits are tax-free. These include:
- parking at or near your workplace
- a mobile phone
- childcare
- meals provided at work which are available to all employees
- drinks and snacks at work
- staff parties
However, if you enjoy any of the following benefits, the taxman will take a slice:
- a company car
- private medical insurance (such as BUPA)
- a loan provided by your employer which is interest-free or where interest is charged below market rates
- living accommodation provided by your employer
Normally, if you earn £8,500 a year or more -- including the cash value of your benefits -- or you’re a company director, then you’ll always have to pay tax on any benefits you receive. (There are exceptions -- such as living accommodation -- which is taxable regardless of your earnings or your role in the company.)
So let’s take a look at how cash equivalents are calculated for a couple of popular benefits. First up...
Company cars
The cash equivalent of a company car is based on the list price of the car including any accessories, its carbon dioxide emissions and the type of fuel it uses.
This tax year, the taxable benefit is 15% of the list price for cars with CO₂ emissions of 135g/km or less. The charge increases by 1% for each additional full 5g/km up to a maximum charge of 35% for emissions of 235g/km or more*.
If the car uses diesel (and it was registered on or after 1 January 1998) there’s a 3% supplement on top. But the maximum charge overall is still 35%.
So in practice this is how it works:
Let’s say the list price for a company car -- including accessories -- is £21,000, the car has CO₂ emissions of 185g/km and it uses petrol. The benefits percentage will increase by 10% to 25% because it is 50g/km above the 135g/km threshold. Therefore the taxable benefit in this example is £5,250 (£21,000 x 25%).
The actual tax deduction is paid at your highest rate of tax. This means if you’re a basic rate taxpayer the company car will cost you £1,050 (£5,250 x 20%) -- or £87.50 a month -- this tax year. Meanwhile, if you’re a higher rate taxpayer, the car will set you back £2,100 or £175 per month at 40% tax.
If the car uses diesel, the taxable benefit will rise to £5,880. The benefits percentage steps up from 25% to 28% with the addition of a 3% diesel supplement. This time a basic rate taxpayer will pay £1,176 (£5,880 x 20%) -- or £98 per month. Higher rate taxpayers will pay £2,352 (£5,880 x 40%) -- or £196 per month.
Bear in mind this possible scenario. You're a basic rate taxpayer but the cash equivalent of the car pushes you into the higher rate tax band. If that happens, part of the calculation will be taxed at 20% and the remainder at 40%.
If you make a capital contribution to the cost of the car -- up to a maximum of £5,000 -- your tax bill will fall. Likewise, if the car runs on alternative fuel -- such as LPG, electricity or hybrid -- the benefits percentage will reduce too.
Don’t forget, if your employer pays the cost of fuel for private use, it will be treated as a taxable benefit too.
Try this HMRC calculator to work out the tax calculation for your own company car.
Next up...
Private medical insurance (PMI)
Thankfully, the calculation for PMI is a little less complex. If your employer pays for your medical insurance, you'll usually have to pay tax on the cash value of the benefit. This is normally taken as the cost of your premiums over the tax year.
Let’s say your employer pays £50 a month on your behalf for a BUPA health insurance policy. The annual cost of the policy -- that is £600 -- is simply added on top of your normal salary and tax is payable at your highest rate once again. As a basic rate taxpayer this will cost £120 this tax year, while a higher rate taxpayer will pay £240.
So you can see these benefits -- while nice to have -- don’t come for free. In fact, once the tax has been deducted, they could take quite a chunk out of your take home pay.
*For cars with CO₂ emissions of 120g/km or less the taxable benefit is 10% of the list price, or 13% for cars which use diesel.
More: How Much Is Your Wage Really Worth? | Five Top Ways To Avoid Tax
