When would taking benefits in kind be more tax efficient than

Benefits in kind (BIK) can sometimes offer a surprisingly tax-efficient way to reward employees compared to paying them additional salary. Whilst many business owners instinctively reach for a pay rise when they want to motivate their team, the tax and National Insurance implications can make this far less efficient than it first appears. Understanding when BIK works in your favour—and when it doesn’t—could save your business thousands of pounds annually. Let’s explore the scenarios where non-cash benefits genuinely make financial sense.

How Tax Works on Salary Versus Benefits in Kind

When you pay an employee extra salary, both you and they face tax charges. The employee pays income tax (20% at basic rate, rising to 40% for higher earners) plus National Insurance contributions (currently 8% up to £50,270, then 2% above). As an employer, you also pay National Insurance at 15% on earnings above £9,100 per employee.

By contrast, many benefits in kind have fixed taxable values far lower than their actual cost, or enjoy exemptions entirely. For example, a company car costing £25,000 might have a BIK taxable value of only £5,250–£7,500 depending on its CO₂ emissions, compared to the full £25,000+ salary cost to deliver equivalent take-home pay. The employee only pays income tax on the BIK value, not on the actual cost to the employer.

Qualifying Benefits That Often Save Money

Company vehicles remain one of the most tax-efficient benefits available. If an employee earns £50,000 and you wanted to give them £15,000 extra salary to buy their own car, the combined employer and employee tax costs would exceed £6,000. Providing a company car instead, with its capped BIK values, frequently costs less whilst delivering better value to the employee.

Gym memberships and health insurance are other classic examples. Health insurance premiums are entirely exempt from BIK taxation under HMRC guidelines, provided the policy covers the employee and their family. A £1,000 annual gym membership costs you just £1,000, but giving equivalent salary would cost roughly £1,350–£1,500 after tax and National Insurance. Staff appreciate wellness benefits, and you save money—a genuine win-win.

Professional fees and subscriptions relevant to an employee’s role can be paid directly without creating a taxable benefit, provided they’re necessary for their job. Accounting software subscriptions, professional body memberships, or industry certifications bypass the BIK taxation entirely.

Childcare support through approved childcare vouchers or direct payments to registered providers is capped at £55 per week (or £243 per month) and entirely tax-free. Given the cost of childcare, this targeted relief is genuinely valuable to working parents.

When Salary Is Still Better

Not every situation favours benefits in kind. If you’re considering paying for something the employee could claim as a personal tax relief—such as professional fees—salary might be preferable if they’re a higher rate taxpayer claiming relief. Additionally, some benefits trigger both income tax and National Insurance contributions on their full value, making them no more efficient than salary.

Remote working allowances are capped at £4 per week (£208 per tax year) without triggering a BIK charge, but once you exceed that threshold, the full amount becomes taxable. In this case, salary might be simpler administratively.

The Pension Alternative

It’s worth mentioning that pension contributions remain one of the most efficient ways to reward employees. Contributions are wholly deductible for corporation tax purposes and create no National Insurance liability—making them remarkably efficient for both employer and employee, especially if the employee is a higher rate taxpayer.

Getting the Detail Right

HMRC is strict about BIK classifications, and getting it wrong creates compliance risks. The taxable value of benefits must be calculated correctly and reported through your payroll software each tax year. Company cars, for instance, require precise CO₂ emissions data and purchase price records.

Next Steps

The tax efficiency of any benefit depends on your specific circumstances—your business structure, your employees’ salary levels, and what they actually value. A benefits package mixing salary, pension contributions, and targeted BIK allowances often delivers the best outcome.

For tailored advice, contact Severn Accounting—we’re here to help.