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How to explain a benefit in kind payment to a limited company director

This article describes how to explain a benefit in kind payment that has been paid out of your business bank account to a limited company director.

Benefits in kind are non-cash rewards, such as a company car or private medical insurance, that an employer may give their employee. The employer must tell HMRC about most benefits in kind that it provides for its employees by either including the value of the benefit on their payroll or by including it on the P11D form they issue to the employee. Please note that benefits in kind need to be reported to HMRC outside of FreeAgent.

Once the relevant bank transaction has been imported into your FreeAgent account via a bank feed or uploaded from a bank statement, you will need to explain it using the appropriate ‘Type’ and ‘Category’ as detailed below. Please note that the options listed below will only be available if your FreeAgent account is listed as a limited company.

If you want your company to claim tax relief on the cost of the benefit, you’ll need to explain the transaction to a profit and loss category. You can create a new category if you need to, for example ‘Staff Welfare’ for the cost of private medical insurance. The benefit in kind category in FreeAgent is part of the director’s loan account and should only be used if you want to deduct the cost of the benefit from the amount owed to the director by the company. If you’re unsure which category you should choose, please ask your accountant.

You’ll need to have level 6 access or above to your FreeAgent account to explain bank transactions.

Explaining the money paid out of your bank account

Navigate to the ‘Banking’ tab at the top of the screen and select ‘Bank Accounts’ from the drop-down menu.

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Choose the relevant bank account from the list.

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Select the transaction that you would like to explain.

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If the company is claiming tax relief on the cost of the benefit, select ‘Payment’ from the transaction ‘Type’ drop-down menu.

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Select the relevant cost category from the ‘Category’ drop-down menu.

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Alternatively, if you want to deduct the cost of the benefit from the amount owed to the director by the company, select ‘Money Paid to User’ as the transaction ‘Type’ and select the relevant director from the ‘Payment to’ drop-down menu. Then, select ‘Benefit in Kind’ from the ‘Category’ drop-down menu.

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Once you’ve selected the appropriate ‘Type’ and ‘Category’ for the transaction, select ‘Explain Transaction’ to complete the process.

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For information on explaining multiple transactions at once, please see this article.

Regardless of which option you choose, a record of the bank transaction being explained will appear in your Audit Trail report.

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