Most benefits in kind are taxable and the employee is taxed on the cash equivalent of the value of that benefit. Where the employee is required to make a payment to the employer in return for the provision of the benefit and actually does so, the cash equivalent of the benefit is reduced by the amount `made good’ by the employee. Making good allows the employee to reduce or eliminate the tax charge.
Harry’s employer provides private medical insurance for Harry and his family. The cost to the employer is £500 a year. Harry is required to make a contribution of £200, which he does. By `making good’ £200 of the cost, the cash equivalent of the benefit on which tax is charged is reduced from £500 to £300.
Where the benefit in question is fuel for a company car, the amount made good by the employee can be computed using the advisory fuel rates.
Helen has a company car. The car is a petrol car, which for 2016/17 has an appropriate percentage of 22%. Helen’s employer pays for all fuel for the car, but Helen is required to make good the cost of fuel for private motoring.
In the year, Helen drives 10,000 private miles. Assuming the advisory fuel rate for her 1600 cc car is 14p per mile and Helen pays her employer £1,400 in respect of her private mileage, she will be regarded as having made good the cost of her private fuel. Consequently, the tax charge is reduced to nil.
Time for making good
Earlier in the year the Government consulted on the deadline by which the employee must make good in order to reduce or eliminate the tax charge that would arise on the benefit in kind. At the time of the 2016 Autumn Statement, it was announced that from 2017/18 the making good deadline for all benefits will be set at 6 July after the end of the tax year in which the benefit was provided. Previously, different dates applied to different benefits, with a deadline of the end of the tax year in which the benefit was provided applying to many.
Better to pay the tax
When thinking about whether to `make good’ to reduce the tax, remember that as the tax rate is less than 100%, you will always be better off paying the tax than making good. A higher rate taxpayer will only save £40 in tax for every £100 `made good’ – better to pay the £40 tax and keep the remaining £60.
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