Benefits in Kind: What Employers Get Wrong and What HMRC Checks

By Carolyn Burchell  |  Correct as of August 2026

Most benefit in kind mistakes we see in small companies come down to one of two things. Either nobody realised that a cost was not really a business cost, or they knew it was personal but did not realise that paying it through the company has consequences.

A phone contract, a gym membership, fuel for weekend journeys, the family car insurance: once it is paid from the business account, it can feel as though the cost has simply been dealt with. In most cases it has not. It usually still has to be treated as something, whether that is a benefit in kind, extra salary or a loan to the director, and each of those carries tax and reporting obligations. Often nobody notices until a year end, a P11D deadline or an HMRC compliance check, by which time the tax, the National Insurance and sometimes the penalties may have been building for some time.

The short answer is this. If the company provides something of value to an employee or director, or pays a bill that belongs to them, it is usually taxable unless an exemption applies. The employee pays income tax on it, the company pays Class 1A National Insurance at 15% on most benefits, and it has to be reported, either through payroll or on a P11D by 6 July after the end of the tax year. This can apply whether you employ fifty people or are the only director and the only employee.

Below we work through the questions we are asked most often, with worked examples, and what changes from April 2027 when payrolling benefits becomes mandatory for the most common ones.

Key Points

What Counts as a Benefit in Kind, and Who Pays the Tax?

Broadly, a benefit in kind is something provided because of someone’s employment that is not paid as salary. Common examples in owner managed companies include company cars and vans, fuel for private journeys, private medical insurance, interest free or cheap loans (including an overdrawn director’s loan account), and the company paying personal costs on someone’s behalf.

The taxable amount is usually the cost to the employer, although cars, vans, fuel and loans have their own statutory calculations. The employee pays income tax at their marginal rate on that figure. The employer pays Class 1A National Insurance at 15%, due by 22 July after the end of the tax year (19 July if paying by cheque).

The Company Pays Some of My Personal Bills. Is That a Benefit in Kind?

Paying a personal bill through your company does not make it a business cost, so it usually has to be either repaid or taxed, and this is where many mistakes start. Repayment normally goes through your director’s loan account. If it is taxed as pay instead, the treatment depends largely on whose name the contract is in.

If the contract belongs to the company and the company provides the benefit, it will generally be a benefit in kind. If the contract is in your own name and the company simply pays the bill for you, HMRC will usually treat that as the company settling your personal liability. Income tax is still reported on the P11D (unless the benefit is payrolled), but the National Insurance is both employee’s and employer’s Class 1, through payroll at the time it is paid, not employer’s Class 1A at the year end. Getting this wrong can mean the wrong National Insurance is paid at the wrong time, and it is something HMRC may look at in a compliance check.

Worked example: a director’s mobile phone. Sarah is the director of her own consultancy company. Her personal mobile contract costs £50 a month and the company has paid it directly for the last three years. Because the contract is in Sarah’s name, the £600 a year is likely to be treated as a personal bill paid by the company. In that case it should have gone through payroll for both employee’s and employer’s Class 1 National Insurance and been reported for income tax.

The fix may be simple. A mobile phone with private use is exempt from tax and National Insurance, provided the contract is between the company and the provider. The exemption is limited to one per employee, and it is the SIM card used privately that counts, not the handset. If Sarah moves the contract into the company’s name, the cost should be tax free going forward. The earlier years may still need correcting, but the problem stops growing.

A similar principle can apply to gym memberships, personal insurance, school fees, home utilities and anything else paid from the business bank account for your benefit. As we explain in our Good Bookkeeping article, entering a transaction is not the same as knowing it has been treated correctly.

I Am the Only Employee of My Company. Do I Still Need a P11D?

A company whose only employee is its director still usually needs a P11D if it provided a taxable benefit that was not payrolled. There is no general exemption for small companies or one person companies. Directors are within the benefit in kind rules regardless of how much they earn.

If no taxable benefits were provided, there is normally nothing to report on a P11D. If HMRC has sent you a P11D(b) form or reminder and you have no Class 1A National Insurance to pay, tell HMRC rather than ignore it.

How Is a Company Car Taxed, and Is Electric Still the Better Option?

The taxable benefit is the car’s list price (including options, not the price you negotiated) multiplied by an appropriate percentage based on its CO2 emissions. For 2026/27 the percentage for fully electric cars is 4%, rising to 5% in 2027/28. Petrol and diesel cars sit much higher, up to a maximum of 37%.

Worked example: an electric company car. A director who pays higher rate tax drives a fully electric company car with a list price of £45,000.

• Taxable benefit: £45,000 x 4% = £1,800
• Income tax for the director at 40%: £720 a year
• Class 1A National Insurance for the company at 15%: £270 a year

For a comparable petrol or diesel car, the percentage is typically several times higher, and the tax and National Insurance rise accordingly. That gap is why electric cars are often the more tax efficient choice for a company car, although the percentages are set to keep rising, so the comparison should be revisited before each new car rather than assumed.

A car is taxable if it is available for private use, not only when it is used privately. Simply telling a director not to use the car at weekends is unlikely to remove the charge if the car is kept at their home. A genuine pool car is exempt, but the conditions are strict, and a car regularly kept overnight at a director’s home is unlikely to qualify. The conditions are summarised in our pool cars infographic on our Useful Stuff page.

Double cab pickups are a related trap. From April 2025 they are generally treated as cars rather than vans for benefit in kind purposes, with transitional rules for vehicles bought, leased or ordered before then that run until the earliest of disposal, lease expiry or 5 April 2029.

Should the Company Pay for Fuel for My Private Mileage?

Paying for fuel used on private journeys in a company car is often poor value, because it triggers a separate car fuel benefit charge. For 2026/27 it is calculated as £29,200 multiplied by the car’s appropriate percentage, and it applies in full however little private fuel is actually used.

Worked example: fuel for a petrol company car. A director has a company car with an appropriate percentage of 30%, and the company pays for all fuel, including private mileage.

• Car fuel benefit: £29,200 x 30% = £8,760
• Income tax for the director at 40%: £3,504 a year
• Class 1A National Insurance for the company at 15%: £1,314 a year

Unless the director’s private mileage is very high, that £4,818 combined cost may well exceed the cost of the fuel itself. The charge can be avoided if the director repays the full cost of private fuel by 6 July after the end of the tax year, which needs accurate mileage records. Ordinary commuting between home and a permanent workplace counts as private mileage for a car.

There is no fuel benefit charge on electricity for a fully electric car.

Can I Take a Company Van Home?

A company van can usually be taken home without a tax charge, because ordinary commuting between home and work in a van is not treated as private use. If private use is limited to commuting and insignificant personal use, such as an occasional stop on the way home, there should be no taxable benefit.

If there is more private use than that, a flat rate charge applies. For 2026/27 the van benefit is £4,170, plus £798 if the company also provides fuel for private use. Fully electric vans have a nil van benefit.

Worked example: a van used at weekends. An employee paying higher rate tax uses a diesel company van for weekend jobs and family trips, and the company pays for all fuel.

• Van benefit £4,170 plus van fuel benefit £798 = £4,968
• Income tax for the employee at 40%: £1,987.20 a year
• Class 1A National Insurance for the company at 15%: £745.20 a year

The question HMRC is likely to ask is what the van is actually used for, so a written policy and a mileage log are much more helpful than an assumption that the vehicle is a business asset.

My Director’s Loan Account Is Overdrawn. Is That a Benefit in Kind?

An overdrawn director’s loan account can create a benefit in kind. If the company lends a director or employee money interest free, or at a low rate, and their loans together go above £10,000, there is a taxable benefit. It is based on the difference between the interest they actually pay and HMRC’s official rate, which is 3.75% for 2026/27.

The timing catches people out. The £10,000 limit is tested across the tax year, from 6 April to 5 April, rather than the company’s accounting period. Clearing the loan before the company’s year end does not help if the balance went over £10,000 at any point during the tax year.

Worked example: a loan repaid before the company’s year end. A director’s company has a 31 December year end. On 1 June 2026 the director borrows £15,000 from the company, interest free, and repays it in full on 30 November 2026, a month before the year end.

• The balance was over £10,000 during the 2026/27 tax year, so the exemption does not apply
• Taxable benefit, worked out on a daily basis for the 183 days the loan was outstanding: £15,000 x 3.75% x 183/365 = £282.02
• Income tax for the director at 40%: £112.81
• Class 1A National Insurance for the company at 15%: £42.30

The figure can differ depending on which of HMRC’s two calculation methods is used, but either way it is not nil, and it still needs to be reported for 2026/27. Because the loan has gone by the time the year end accounts are prepared, this is easy to miss unless someone checks the balance throughout the tax year.

Repaying before the year end does avoid a separate corporation tax charge under section 455, provided the money is not simply borrowed again shortly afterwards. Where a loan is still outstanding nine months after the company’s year end, that charge is currently 35.75% of the outstanding balance for loans made on or after 6 April 2026 (33.75% for earlier loans). The director can generally avoid the benefit in kind charge by paying the company interest at the official rate, which the company then declares as income. Our director’s loans article explains section 455 in more detail, including what happens if a loan cannot be repaid in time.

Which Benefits Are Actually Tax Free?

Several benefits can be provided tax free, but each exemption has conditions that are easy to miss.

• Mobile phones: one SIM with private use per employee, with the contract in the company’s name.
• Trivial benefits: gifts costing no more than £50 each, not cash, and not a reward for work. Directors of close companies are capped at £300 a year. Our trivial benefits article covers the conditions in detail, and there is a summary infographic on our Useful Stuff page.
• Staff parties: an annual event open to all staff, costing no more than £150 a head in total across the year. If the cost goes even slightly over £150 a head, the whole amount is normally taxable, not just the excess.
• Employer pension contributions: not a benefit in kind, and often one of the more efficient ways to extract value from a company, alongside the mix of salary and dividends covered in our salary vs dividends article. For the company to get corporation tax relief, the contributions need to be made wholly and exclusively for the purposes of the business. For directors and family members, that generally means their overall package, including pension contributions, should be commensurate with the work they do.
• Home working costs: employers can still contribute towards additional household costs where an employee is required to work from home. Employees can no longer claim the relief themselves from April 2026, so if you want to support home workers, support would need to come from the employer.

Private medical cover is generally not exempt. For a director or employee it is usually a taxable benefit, and it is one of the benefits being brought into mandatory payrolling first.

What Does HMRC Look for When It Checks Benefits in Kind?

Employer compliance checks tend to start with the records rather than the P11D. In our experience, the areas HMRC officers focus on in small companies include:

• Personal costs posted to general expense codes such as motor, sundry or subscriptions
• Vans and double cab pickups claimed as commercial vehicles with no evidence of how private use is restricted
• Fuel paid for company cars without mileage records or reimbursement
• Director’s loan accounts that become overdrawn during the year and are cleared just before the company’s year end
• Contracts in a director’s own name paid by the company with no employee’s or employer’s Class 1 National Insurance
• P11D figures that do not match what the accounts show

When errors are found, HMRC may look back over several years, and tax, National Insurance, interest and potentially penalties can all follow. A check is usually much easier to deal with when the records already show that each benefit has been considered and treated correctly.

What Changes From April 2027?

From 6 April 2027, payrolling benefits becomes mandatory for company cars, car fuel, vans, van fuel and employer provided medical benefits. Instead of reporting these on a P11D after the year end, employers will need to include the taxable value in each pay run, so the employee pays tax on the benefit as they go. Most other benefits are due to follow from April 2028, while loans and accommodation are expected to remain voluntary.

HMRC has also confirmed that from April 2027, employers who payroll benefits must account for the Class 1A National Insurance in real time through payroll as well, rather than separately at the year end.

In practice this means the details of every company vehicle and medical policy need to be accurate in your payroll software before the first pay run of April 2027, and a mistake could flow through every payslip rather than sitting quietly until a P11D is prepared. HMRC has said that final guidance is expected to align with the Autumn Budget on 28 October 2026, so some of the detail may still change. We will update our clients once it is published.

What Should I Do Before 5 April 2027?

• Go through the last twelve months of the accounts and identify anything paid for an individual’s benefit.
• Move personal contracts such as mobile phones into the company’s name where an exemption applies, or put the cost through payroll.
• Review the director’s loan account balance throughout the tax year, not just at the company’s year end.
• Record list prices, CO2 emissions and availability dates for every company car, and decide whether fuel for private use is worth providing at all.
• Check whether vans and pickups are genuinely restricted to business use and commuting, and keep evidence.
• Confirm your payroll software, or your payroll provider, is ready for mandatory payrolling.

Talk to Us About Your Benefits

Benefits in kind are rarely the largest number in a small company’s tax affairs, but in our experience they are one of the areas most often got wrong, and correcting several years at once usually costs more than getting it right now. With mandatory payrolling starting in April 2027, this is a good time to review what your company provides and how it is treated.

If you would like us to look through your benefits, vehicles and director’s loan account before the new rules start, get in touch. We are based in Billingshurst, West Sussex, and work with owner managed companies on exactly these questions.

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