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 employment 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 your employer pays or reimburses your expenses, you may have to pay tax on the payments. But if they are expenses incurred as part of your job, you may get automatic tax relief.
If you are an employee and incur expenses in connection with your employment that are not paid or 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 even if they are taxable, although there are some exceptions.
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.
From 6 April 2016, the rules say that, 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, less any part of that cost made good by you. The main exceptions to this rule are company cars, living accommodation and cheap loans where special valuation rules apply. You can read more about this in our section 'What are benefits-in-kind?'.
You can read more about the rules for benefits provided before 6 April 2016 in the section below ‘What was the £8,500 threshold?’.
If you are an employee, your employer might pay or reimburse your employment expenses. If they don’t, you may be able to claim certain expenses as a deduction against your employment income and get tax relief.
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 'What if I use my own car for business purposes?' in this section.
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 such employees.
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.
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 the benefits 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.
The vast majority of people were taxed according to the normal rules. You can find more information on these rules in our section ‘What are benefits-in-kind?’.
There were certain circumstances where the taxable benefit was the same no matter what your earnings. These included where you received:
- Living accommodation;
- Payment of a personal bill by your employer.
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