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Employment benefits and expenses
We look at employment benefits and expenses, how they are valued and the related tax treatment. We also consider the position before 6 April 2016.
Employment benefits: know the rules
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. Alternatively, if the benefit has been provided to you as part of a salary sacrifice scheme, you may pay tax on the salary given up rather than the value of the benefit. You can read about such arrangements at our paragraphs dealing with salary sacrifice.
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 should 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 provided that you are a taxpayer.
Normally, employees do not pay National Insurance contributions (NIC) on benefits and expenses even if they are taxable, although there are some exceptions.
What are employment benefits?
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 on the page How is my tax collected?.
Some non-cash benefits are completely exempt from tax.
What is the value of the taxable benefit?
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 on the page What are benefits-in-kind?. Remember if you have been provided with the benefit as part of a salary sacrifice arrangement, you may instead be taxed on the value of the salary given up.
You can read more about the rules for benefits provided before 6 April 2016 in the section below What was the £8,500 threshold?.
What are employment expenses?
If you are an employee, your employer might pay or reimburse your employment expenses. If they do not, 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 the next few pages.
What was the £8,500 threshold?
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 employees earning less than £8,500.
Employees who earned less than £8,500
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 test of earning less than £8,500. 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 had a salary of £7,000, a bonus of £1,000 and benefits valued at £1,400 (total £9,400). This employee is not an employee earning at a rate less than £8,500. In this instance the benefits would be taxed in the normal way.
If you were a director of a company you could not normally be treated as meeting the under £8,500 per year test, 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.
What information can I find in the employment benefits and expenses pages?
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