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Benefits in Kind: An Overview

What Are Benefits in Kind?

The use of benefits in kind by companies to compensate or reward employees is a well-established practice in many countries. For many companies it is viewed as a key component to drive employee engagement and staff retention.  Sometimes referred to as ‘fringe benefits’, benefits in kind (BIK) are allowances or additional compensation that are not included in the paycheck as wages, but carry financial value. In some cases, BIK can amount to 30-40% of the total compensation package due to the value of the items included.

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For some employees, BIK packages are as important as the salary when they are negotiating an employment agreement, and so it is useful to review the current status of BIK when making an offer to employees who are working either domestically or overseas. Benefits in kind are of particular relevance to workers on international assignments for four reasons:

  1. International assignees may be entitled to a greater range of BIK than local employees
  2. It is still common practice for expatriate assignees to receive BIK as part of their ‘expat package’
  3. Use of BIK can provide savings for the employer by reducing the Total Cost of Employment (TCE)
  4. BIK can benefit the employee by reducing their individual income tax

Examples of the Most Common Benefits in Kind

There is a wide array of BIK used to compensate employees, and in some cases the BIK package can be as lucrative as the salary.  Some examples of the most common BIK include:

  • Pension or retirement benefits
  • Housing Allowances or Below Market Rent
  • Moving and Relocation Expenses
  • Use of a Company Car
  • Childcare Expenses
  • Tuition or education subsidy
  • Interest Free or Low Cost Loans
  • Insurance (e.g. Health, Life or Income Protection)
  • Commuting Expenses
  • “Per diem” or daily allowances for meals, lodging or travel

A few of these such as health insurance are offered to many employees, while other BIK are reserved for executives or those working overseas who may have unusual living expenses and hardships. It is common for workers who are assigned to a hardship posting to receive a higher grade of health insurance.  All BIK are negotiable just as the salary, and can have a significant financial impact for an employee.  For example, a worker on an overseas assignment may receive a housing allowance that covers 100% of the expense, which results in the ability to save a larger portion of the paycheck.

However, not all BIK will escape taxation, and it is necessary to know the tax laws regarding BIK prior to negotiating a contract.  Some BIK are non-taxable, while others will be included in the tax return and taxed as wages. This is particularly important for international assignments where the policy of the host country towards benefits in kind may be very different to the home country.

Law and Tax Policy for BIK

Every country will have its own tax policy regarding BIK, but there are similarities when it comes to items that are taxable.  For example, pension contributions by the employer are almost always tax-free, at least until withdrawal by the employee.  Also, moving or relocation expenses and most childcare expenses are typically not taxed. Some countries such as the UK, will not tax BIK if you earn less than the personal allowance on the income tax return.

In some cases, housing allowances or use of company cars will not be taxed if the use is necessary to carry out employment duties.  Housing that is paid due to security risks or proximity to work sites would not be taxed, and vehicles used exclusively for company use are tax-free.  Each country has specific rules regarding these items, and should be thoroughly researched before agreeing to a BIK package in order to evaluate the tax consequences.

In addition benefits in kind can be delivered in a few different ways, for example through salary packaging or salary sacrifice. This can mitigate the tax burden by allowing the employee to exchange pre-tax wages for the benefit. In the UK this is known as flexible benefits or a ‘flex scheme’ and according to Towers Watson up to 20% of employers offered a flex scheme in 2014.

Which Types of BIK Have the Most Value?

The BIK items with the most value are those that offset normal living expenses, such as housing and transportation, but qualify for tax-free treatment.  This type of BIK is similar to receiving tax-free salary compensation, since wages will not have to be used to cover the expense.  The offering of shares or options can also be a lucrative form of BIK (although not strictly a benefit and usually taxable) due to the potential for increases in market value.

Pros and Cons of BIK for Employees Working Abroad

Employees on overseas assignments may be offered more BIK than their domestic counterparts due to the expense and hardship associated with the position.  Some of the advantages of BIK for employees abroad include:

  • Ability to save a greater percentage of salary due to tax-free BIK covering living expenses while on assignment
  • The company may be willing to absorb the risk and expense of currency fluctuations and expense changes
  • Gives the employee a means to maintain a principal residence in their home country while on overseas assignment

The disadvantages associated with BIK may be:

  • Reduction in salary based on the BIK package to normalize compensation levels among certain classes of employees
  • Currency risks if the allowances are calculated in the currency of the home country
  • Certain BIK may be viewed as taxable by tax authorities, even if they are necessary to carry out the assignment overseas. The employee may be subject to taxes in both the home and host location leading to a conflict in how the benefits in kind are treated by the tax authorities.

Negotiating a Better BIK Package for a New Position

One of the well-known facts in human resources is that the best way to obtain an increase in compensation is to find a new position.  However, employees may not think enough about the BIK package before negotiating salary, and it is necessary to research expenses and the value of BIK for an overseas position.  Some of the most valuable BIK for an expat will include:

  • Housing Allowances
  • Cost of Work Visas
  • Education and Healthcare Expenses
  • Return Flights to the Home Country
  • Repatriation Expenses

Once the research has been completed, an employee will be able to approach the negotiation process based on the specific location, and will not have to rely on the company or recruiter to offer specific BIK for the position.

Summary

Benefits in kind are not as generous as in the past as many companies have cut this type of expense, but expat workers still have access to many of the BIK due to specific demands of working in a foreign location.  However, ‘hardship’ compensation will be harder to obtain as overseas assignments are now viewed as an opportunity to advance rather than a professional and personal challenge.  Both employees and employers should understand the specific tax rules that will apply in their own countries, since not all BIK are tax-free and this will affect the final compensation amount.

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The information in this article is subject to changes in local legislation.

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