Employment benefits and expenses
In this section, we look at employment benefits and expenses and the related tax treatment.
There is a common misconception that non-cash benefits are tax free. Indeed some are tax free, but others are not, so it is important to know the rules.
If you are an employee and your employer gives you non-cash benefits, they can be treated as additional income and you might have to pay tax on the benefits.
If you are an employee and you are reimbursed for expenses, you may have to pay tax on the payments. But if they are expenses you incurred as part of your job, you may get tax relief on these expenses.
If you are an employee and incur expenses in connection with your employment that are not reimbursed by your employer, you may be able to claim tax relief on them.
Normally, employees do not pay National Insurance contributions (NIC) on benefits and expenses.
If you are an employee, your employer may provide you with non-cash benefits, for example a mobile phone or company car, in addition to your normal wages. These non-cash benefits are sometimes called 'benefits in kind' or 'perks' of the job.
You have to pay tax on some of these benefits and there are usually special rules to work out the amount of the taxable benefit. You can read about how tax is collected on these benefits in our section 'How is my tax collected?'
Some non-cash benefits are completely exempt from tax.
Up to 5 April 2016 how you were taxed on a non-cash benefit could depend on whether or not you were a 'lower-paid employee' – that is, whether you earned at a rate of £8,500 or more per year, or less than this amount. The rules were more generous for the very low paid.
To work out if you earned at a rate of £8,500 or more per year, you had to include the value of any benefits you received. So your actual ‘cash’ salary may have been beneath the threshold, but the value of benefits in kind could have meant you still failed the lower-paid employee test. Generally, in working out the £8,500 threshold, you added in benefits at their actual cost to the employer.
Example (say for the tax year 2015/16)
An employee has a salary of £7,000, a bonus of £1,000 and benefits valued at £1,400 (total £9,400). This employee is not a lower-paid employee. In this instance all benefits and expense payments will be taxed in the normal way.
If you were a director of a company you could not normally be treated as a lower-paid employee, however much you earned. There were exceptions for directors of charities and not-for-profit organisations though.
That depends on whether the benefit was provided on or after 6 April 2016 or before that.
Benefits provided on or after 6 April 2016
Generally, the taxable value of a benefit is the cash equivalent value. This is usually the amount it costs your employer to provide you with the benefit. You can read more about this in our section 'What are benefits in kind?'
Benefits provided in tax years up to and including 2015/16
If you were a lower-paid employee, then generally the taxable benefit was the cash amount you were able to convert the benefit into. For example if you were given a printer that originally cost £350 and you were able to sell it second hand for £50, the taxable benefit was £50.
However, you cannot sell some benefits on the open market, for example, the use of a company car or van, a cheap loan or private medical insurance. In these cases, there was no taxable benefit.
Employees earning £8,500 and over
The vast majority of people were taxed according to the rules for employees who earned at a rate of £8,500 per year and over. You can find more information on these rules in our section ‘what are benefits in kind?’.
There were certain circumstances where the taxable benefit wass the same no matter what your earnings. These included where you received:
- Living accommodation;
- Payment of a personal bill by your employer.
If you are an employee, you may be able to claim certain expenses as a deduction against your employment income, or your employer might reimburse you.
There are various rules governing the tax treatment of employment expenses.
You can find information on 'What if I incur expenses in connection with my job?' 'What travel expenses can I claim?' and using your own car for business purposes in this section.
In this section we cover the following topics:
- What are benefits in kind?
- What payments and benefits are non-taxable?
- What if I incur expenses in relation to my job?
- What travel expenses can I claim?
- What if I use my own car for business purposes?
- Payroll giving
These sections relate to employees earning more than £8,500 per year and directors.