Why Directors Should Consider Benefits, Even If Benefit in Kind Applies
Many small limited company directors try to avoid benefits in kind because they worry about extra tax.
That is understandable.
A benefit in kind can create a personal tax charge for the director and a Class 1A National Insurance charge for the company.
But this does not automatically mean the benefit is a bad idea.
In some cases, a taxable benefit can still be more tax-efficient than paying for the same cost personally from after-tax income.
The key is to look at the full cost, not just the benefit in kind charge.
The basic rule of thumb
A useful rule of thumb is this:
If the company pays for something, the director does not have to pay for it personally from after-tax income.
This matters because personal spending is usually funded from salary, dividends or other income after tax has already been paid.
For example, if a director pays for a car lease personally, they need enough personal income left after Income Tax, dividend tax and National Insurance, where relevant, to cover that cost.
If the company pays for the car instead, the company may get Corporation Tax relief, may be able to reclaim some VAT, and the director may only be taxed on the benefit in kind value rather than the full cost paid by the company.
This is why benefits should not be dismissed automatically.
Benefits in kind are not always bad
A benefit in kind simply means that the director or employee receives something from the company that has personal value.
Common examples include:
company cars;
private medical insurance;
accommodation;
beneficial loans;
gym memberships;
and assets made available for private use.
Some benefits are tax-free if the rules are met.
Others are taxable.
The important question is not just:
“Will there be a benefit in kind?”
The better question is:
“Is the total cost lower than paying for this personally?”
How to compare the cost properly
When reviewing a company benefit, you need to consider both sides.
For the company:
what is the gross cost?
can any VAT be reclaimed?
is the cost deductible for Corporation Tax?
does the company need to pay Class 1A National Insurance?
what is the real cost after Corporation Tax relief?
For the director:
what is the taxable benefit?
what personal tax will be due?
would the director otherwise need to take more salary or dividends to pay for the same item personally?
what tax would be due on that extra salary or dividend?
This is why a benefit can still make sense even where a benefit in kind applies.
Electric company cars: a good example
Electric company cars are one of the best examples of why this matters.
A fully electric company car is still a benefit in kind if it is available for private use.
However, the taxable benefit is usually much lower than for many petrol or diesel cars.
For 2026/27, the appropriate percentage for a zero-emission company car is 4%.
This means the director is not taxed on the full cost of the car or the full lease payments.
Instead, the company car benefit is broadly based on the car’s list price multiplied by the appropriate percentage.
Simple benefit in kind example
Assume the company provides a fully electric car to a director.
The car has a list price of £40,000.
For 2026/27, the benefit in kind rate is 4%.
The taxable benefit is:
£40,000 × 4% = £1,600
If the director pays tax at 20%, the personal tax cost would be:
£1,600 × 20% = £320
If the director pays tax at 40%, the personal tax cost would be:
£1,600 × 40% = £640
The company will also normally need to report the car benefit and pay Class 1A National Insurance.
For 2026/27, the Class 1A National Insurance rate on expenses and benefits is 15%.
So the company’s Class 1A National Insurance cost in this example would be:
£1,600 × 15% = £240
This is why the calculation needs to look at both the company cost and the director’s personal tax cost.
What about the lease payments?
Assume the company leases the electric car for £250 per month plus VAT.
The monthly invoice would be:
£250 + £50 VAT = £300
For a leased qualifying car used for business purposes, HMRC says the business cannot normally recover 50% of the VAT, but can reclaim the remaining 50%, subject to the normal VAT rules.
So, in this example:
monthly lease cost excluding VAT: £250;
VAT charged: £50;
VAT reclaimed: £25;
unrecovered VAT: £25;
monthly cost to the company after VAT recovery: £275.
The annual company cost is:
£275 × 12 = £3,300
For fully electric leased cars, the normal 15% lease restriction does not apply.
This means the lease payments should normally be fully deductible for Corporation Tax, provided the cost is incurred wholly and exclusively for the company’s business and is properly recorded.
What is the cost after Corporation Tax relief?
A company tax deduction does not mean the cost is free.
It means the cost reduces the company’s taxable profit.
The value of the deduction depends on the company’s Corporation Tax rate.
Using the example above, the annual lease cost after VAT recovery is £3,300.
If the company pays Corporation Tax at 19%, the tax saving is:
£3,300 × 19% = £627
The cost after Corporation Tax relief is:
£3,300 - £627 = £2,673
If the company is in the marginal relief band and the deduction saves tax at 26.5%, the tax saving is:
£3,300 × 26.5% = £874.50
The cost after Corporation Tax relief is:
£3,300 - £874.50 = £2,425.50
If the company pays Corporation Tax at 25%, the tax saving is:
£3,300 × 25% = £825
The cost after Corporation Tax relief is:
£3,300 - £825 = £2,475
This shows why the Corporation Tax rate matters when looking at the real cost of a company benefit.
Compare this with paying personally
Now compare this with the director paying for the same car personally.
If the lease costs £300 per month including VAT, the director needs £3,600 per year of personal money to pay for it.
That money usually has to come from salary or dividends.
Salary may suffer Income Tax and National Insurance.
Dividends are paid from company profits after Corporation Tax and may also be taxed personally.
So the company may need to generate more than £3,600 of profit for the director to end up with £3,600 personally after tax.
This is the part many directors miss.
When something is paid personally, the cost is paid from after-tax income.
When something is paid by the company, the company may receive tax relief, and the director may only be taxed on the benefit value.
That is why the company route can still be worth considering, even where a benefit in kind applies.
The extra advantage with electric company cars
Electric company cars can have another advantage.
With petrol or diesel company cars, private fuel can create a separate fuel benefit charge if the company pays for fuel and the employee does not fully reimburse the private fuel cost.
With fully electric company cars, electricity is not treated in the same way as fuel for the fuel benefit charge.
HMRC’s Employment Income Manual confirms that where an employer allows a company car to be charged at work, there is no taxable benefit because electricity does not sit within the meaning of fuel, and the fuel benefit charge does not apply.
HMRC also says that you do not have to pay or report on charging an employee’s fully electric car if the employer owns or hires it.
HMRC’s guidance also confirms that where an employer reimburses the cost of electricity for charging a company car at home or at a public charging point, there is no separate benefit charge, provided the reimbursement is solely for the company car.
This can make electric company cars much more attractive than many other company cars.
What about home charging and VAT?
The benefit in kind position and VAT position are not the same thing.
For VAT, HMRC says that when an employee charges an electric vehicle at home, the electricity supply is made to the employee and not to the employer. This means the employer is not entitled to recover VAT on the cost of charging at home.
However, if an employee charges an electric vehicle at a public charging point, HMRC says the supply is made to the company or employer, and VAT may be recoverable subject to the normal input tax rules.
So, even where there is no extra benefit in kind charge, VAT recovery still needs to be considered separately.
Do not look at the benefit in kind in isolation
The biggest mistake is looking only at the benefit in kind charge and ignoring the wider tax picture.
A taxable benefit may still be worthwhile where:
the company receives Corporation Tax relief;
the company can recover some VAT;
the director avoids paying personally from after-tax income;
the benefit in kind charge is relatively low;
and the company cost makes commercial sense.
This does not mean every benefit should go through the company.
Some benefits have high tax charges.
Some are not commercially sensible.
Some create extra admin, reporting and National Insurance costs.
The answer depends on the numbers.
Common mistakes to avoid
Small company directors should avoid:
assuming a benefit in kind is always bad;
assuming a company-paid cost is automatically tax-free;
ignoring the director’s personal tax position;
forgetting Class 1A National Insurance;
looking at lease payments without considering VAT;
comparing company costs with personal costs before tax instead of after tax;
forgetting that the company car benefit is based on the list price, not the monthly lease payment;
and choosing a vehicle without checking the benefit in kind rate first.
Final thoughts
Benefits in kind should not be dismissed automatically.
The key point is that a company-paid benefit may mean the director does not need to fund the same cost personally from after-tax income.
Electric company cars are a good example.
There is still a benefit in kind charge, but for fully electric cars the taxable value can be much lower than expected, the company may receive Corporation Tax relief, some VAT may be recoverable on lease payments, and charging can be treated more favourably than fuel.
The right question is not:
“Is there a benefit in kind?”
The better question is:
“What is the total cost to the company and the director compared with paying for this personally?”
At Busy Bee, we help small limited company owners stay compliant, tax efficient and in control of their business finances.
Disclaimer: The content on this page is for general information only and should not be treated as tax, legal or financial advice. Tax planning should always be reviewed against your individual circumstances before action is taken.
Comments