As an employee, you are subject to tax on all earnings from your employment. “Earnings” includes not only what you get paid as salary or wages, but anything else that is provided to you by your employer that has value, unless it is specifically exempted by legislation or an HMRC statutory concession. This is generally known as a benefit-in-kind.
Where an employer does provide a benefit-in-kind, two questions need to be resolved:
- What is the value of the benefit that is provided? This is the amount on which tax will have to be paid, and
- How will the tax be collected?
Company cars and vans
One of the most common benefits provided by an employer is where your employer allows you to use a car or van that they own or lease (often called a company car, or company van), and the provision of free fuel for that vehicle. There are complicated rules for calculating the amount that needs to be included as taxable income where a vehicle or free fuel are provided.
- Company car: The taxable benefit for a car is based on the list price of the car (including any accessories), the vehicle’s carbon dioxide emissions, the type of fuel it uses and its date of registration. HMRC have a calculator for working out car benefits which can be found at https://www.tax.service.gov.uk/guidance/work-out-company-car-and-fuel-benefit/start/tax-year.
- Fuel for company cars. If you receive free fuel for your company car, there is an additional benefit.
- Company vans: a benefit arises for the use of a company van only if you use it for journeys other than home to work. If you do use the van for private journeys, the benefit in kind for the tax year 2024/25 will be £3,960. HMRC update the taxable benefit figure each year. The amount can be reduced in some circumstances. HMRC guidance is at https://www.gov.uk/expenses-and-benefits-company-vans.
- Fuel for company vans: For the tax year 2024/25, the taxable benefit of receiving free or subsidised fuel for the private use of a van is £757.
Other benefits
For most other benefits, the taxable amount is based on the cost to the employer of providing the benefit. The most common benefits include Private Health Insurance, Vouchers, and the Provision of Goods or Services that are manufactured or sold by the employer. HMRC have an A-Z list of expenses benefits and their tax treatment. This is intended for use by employers, but it contains useful information for employees. https://www.gov.uk/expenses-and-benefits-a-to-z.
Collection of tax on benefits-in-kind.
There are two ways in which tax can be collected on an employee’s benefits:
- Using an annual report (form P11D) that the employer sends to HMRC by 6 July each year. The report identifies each employee who has received a benefit and the value received. HMRC use the information on the P11D to calculate the additional tax due from each employee. The employer also must provide this information to the employee by providing them with a copy of the P11D.
- Using a process known as “payrolling”. The employer, at each payment of salary or wages, includes an amount of additional income based on the valuation of the benefit provided. PAYE tax is calculated on the salary and the benefit, which results in additional tax being deducted from the salary or wages. This method is currently optional for employers but will become compulsory for the 2026/27 tax year for all employers. If all benefits provided are payrolled, the employer does not have to prepare forms P11D and HMRC does not have to calculate tax due, so this process reduces administration.
Under the P11D method, HMRC calculates the additional tax due from the employee and will, where possible, collect the additional tax by adjusting the employee’s tax code so that additional tax is deducted from each month’s or week’s pay. See https://taxaid.org.uk/guides/information/issues-for-employees/employee/what-your-paye-code-means. Where it is not possible to collect the tax by adjusting the tax code for the current or next tax year, HMRC will issue a form P800 https://www.gov.uk/tax-overpayments-and-underpayments and could issue a simple assessment to collect the tax due.
Your employer will only advise HMRC of the number of taxable benefits once a year, so if there is a change in your circumstances during a tax year and you no longer receive a benefit or start to receive an additional benefit, you should advise HMRC, so that your tax code can be adjusted. You should also check your coding notice carefully to make sure that the correct benefits have been reported and advise HMRC if there is an error.
Under the payrolling process, it is up to the employer to calculate the amount of the taxable benefit and deduct tax based on that amount. If your employer uses the payrolling method, you should check your payslip to make sure that the benefits included in your taxable income are correct and ask your employer, not HMRC if there appears to be an error or omission.
From 6 April 2026, all employers will have to use the payrolling process and the P11-D method will no longer be an option.
Non-taxable benefits
There are some employment benefits that are specifically exempted from tax, these include:
Childcare, Employer Pension contributions, free or subsidised meals, provision of mobile phones for business use, long service awards and suggestions schemes, staff welfare and counselling schemes, training and retraining costs, provision of sports facilities and annual staff parties of limited cost. For these benefits, there is no requirement for them to be reported to HMRC and your employer will not use the payrolling process to collect extra tax.
