Benefits-in-kind – avoiding unnecessary tax charges

Benefits-in-kind (BIKs) are a common feature of remuneration packages, particularly for directors and senior employees. While benefits can be an efficient way of rewarding staff, they often give rise to income tax charges for the employee and Class 1A National Insurance contributions (NICs) for the employer.

In some circumstances, it is possible to avoid or reduce the tax charge on a benefit if the employee reimburses the employer for the value of the benefit received. However, strict rules and deadlines apply, and missing these deadlines can result in tax becoming payable even where reimbursement is eventually made.

“Making good” a taxable benefit

An employee can avoid being taxed on a benefit (or reduce the taxable value of that benefit) if they “make good” the cost by reimbursing their employer for the benefit received.

To be effective for tax purposes:

• The reimbursement must be actually paid, not merely agreed
• It must be paid by the relevant deadline
• It must relate to the value of the benefit provided

Late reimbursement does not remove the tax charge, even if the employer ultimately recovers the cost.

Deadlines for making good – 2025/26 benefits

The deadlines for reimbursing benefits depend on whether the benefit has been payrolled or reported on a P11D.

Non-payrolled benefits (reported on a P11D)

For taxable non-payrolled benefits provided in 2025/26, reimbursements must be made by:

6 July 2026

This date aligns with the deadline for submitting P11D forms to HMRC. If reimbursement is not made by this date, the full value of the benefit will be taxable on the employee, and the employer will be liable to Class 1A NICs.

Payrolled benefits

Where benefits are payrolled, the deadlines are earlier:

• 1 June 2026 – for the value of vehicle fuel used privately
• 5 April 2026 – for all other payrolled benefits

If these deadlines are missed, the benefit will remain taxable even if reimbursement is made later.

Beneficial loans and overdrawn directors’ loan accounts

General rule

The usual “making good” deadlines do not apply to:

• Beneficial loans, including overdrawn directors’ loan accounts

Where the balance on such loans exceeds £10,000 at any point during the tax year, a taxable benefit arises unless sufficient interest is paid.

Importantly:

• The benefit calculation takes account of the loan balance throughout the year, not just the days on which the balance exceeded £10,000
• A benefit can therefore arise even if the loan only exceeds £10,000 briefly

Avoiding the loan benefit charge

The taxable benefit can be avoided if:

• Interest is paid at at least the Official Rate, and
• The borrower is legally obliged to pay interest

The Official Rate of interest is currently 3.75% per annum.

Although beneficial loans are excluded from the formal “making good” deadlines, in practice it is advisable for borrowers to:

• Pay any interest due by 6 July following the end of the tax year

This helps avoid any uncertainty as to whether a taxable benefit exists at the time the P11D is prepared and submitted.

Practical risks with loans

Overdrawn directors’ loan accounts can give rise to multiple tax issues, including:

• A benefit-in-kind charge on the director
• A corporation tax charge on the company (under separate rules)
• Cash flow issues if loans are not cleared promptly

Regular monitoring of loan balances and interest charges is therefore essential.

Company cars and other benefits

Increasing car benefit charges

The benefit-in-kind charges for company cars continue to increase and are due to rise further over the coming years. The tax charge is based on:

• The car’s list price; and
• Its CO₂ emissions

Higher-emission vehicles attract significantly higher tax charges, making them increasingly expensive as a form of remuneration.

Reviewing car policies

If you have a company car, or provide cars to employees, it is important to review whether they remain tax-efficient.

Planning considerations include:

• Switching to lower-emission or electric vehicles, which generally attract lower benefit charges
• Considering whether a cash allowance or mileage reimbursement would be more tax-efficient
• Reviewing fuel arrangements, as fuel benefits are often particularly costly unless private mileage is minimal

Key planning points

• Do not miss the deadlines for making good benefits if you want to avoid a tax charge

• Keep clear records of:

  • Benefits provided
  • Reimbursements made
  • Dates of payment
• Review beneficial loans and directors’ loan accounts regularly to ensure interest is charged and paid where required
• Pay loan interest by 6 July following the tax year to minimise the risk of disputes with HMRC
• Reassess the tax efficiency of company cars, particularly as benefit rates continue to rise
• Consider switching to lower-emission vehicles or alternative remuneration structures where appropriate

Final thoughts

Benefits-in-kind can form a valuable part of a remuneration package, but the tax rules are detailed and the deadlines strict. A failure to act in time can easily result in unexpected income tax charges for employees and additional NIC costs for employers.

Regular review of benefits, careful monitoring of reimbursement deadlines and proactive planning around cars and loans can help ensure that benefits remain cost-effective and tax-efficient. Professional advice should be taken where arrangements are complex or where significant values are involved.