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Benefits and expenses
Taking on an employee
As well as cash pay, your employee may have to pay tax on certain benefits and expenses provided to them by you.
In addition, you, as the employer, may need to tell HMRC and pay Class 1A National Insurance contributions (NIC) on them. There are different rules for what you have to report and pay depending on the type of expense or benefit that you provide – some benefits and business-related expenses are exempt, meaning there will be nothing to report or pay.
There is some basic information about benefits and expenses on GOV.UK. However the rules can be quite complicated, so here we go into more detail.
Payment or reimbursement of employee expenses
You may pay or reimburse some of your employees' business or non-business expenses. Payments made to employees for their travel is a common type of ‘business’ expense. For example, a train fare when accompanying you to a business meeting.
A non-business expense might be something like a smart, new suit for your employee to attend an important business meeting (believe it or not, ordinary clothing is not seen as a business expense, even if it is bought solely for work purposes!)
Qualifying expenses exemption
There is a tax and NIC exemption for qualifying business expenses – which effectively means that employers do not have to declare paid or reimbursed expenses to HMRC and there are no tax or NIC consequences.
Claire sends her employee, Sandy, to a trade fair in Manchester to check out a new product she is interested in buying for use in her business. Sandy pays £80 for the train fare. On her return, Claire reimburses Sandy £80. The trip to Manchester was wholly for business purposes so Claire can simply pay over £80 in expenses with no tax or NIC deducted. The £80 does not need to be included in any payroll submission and there are no other reporting requirements.
You can find some basic information about the business expense exemption regime on GOV.UK.
There are several different types of qualifying business expenses which include:
- Special tools and clothing – clothing typically covers items such as uniforms, overalls, protective gloves and boots. (However please note, as stated above, that the cost of normal, everyday clothing is not qualifying, even if your employee wears it to work.)
- Professional fees and subscriptions – these are qualifying if they are amounts your employee has to pay in order to carry on their profession. HMRC also allow annual subscriptions to certain professional organisations approved by them, and they regularly publish a list of approved bodies.
- Travel and subsistence expenses incurred on qualifying business journeys. Some of the rules on this can become quite complicated, and there is an entire HMRC guidance booklet dedicated to employee travel. (Please also see our guidance on being able to reimburse an amount on a tax- and NIC-free basis if your employee uses their own car for business travel.)
⚠️ You should be very careful about travel expenses incurred in commuting to and from work and any other private travel as generally these are not ‘allowable’ for tax relief purposes. This means that if you are paying or reimbursing the costs of these, it will be taxable on your employee.
Other expenses may be covered by the exemption provided:
1. the employee is obliged to incur and pay the expenses as holder of the employment, and
2. the amount is incurred wholly, exclusively and necessarily in the performance of the duties of the employment.
These terms ‘wholly, exclusively and necessarily’ are interpreted very restrictively by HMRC.
You can find more information about these terms in HMRC’s booklet on expenses and benefits but basically they mean that any person performing the role would have to incur the expenses. Note that the expenses must also be incurred while performing their duties rather than putting them in the position where they are able to perform those duties.
Although the exemption system seems straightforward on the face on it, the exemption is subject to the condition that the employer satisfies itself that any expenses they pay or reimburse are ‘qualifying’. It will therefore be necessary to check that employees are incurring and paying amounts for business expenses, and that they are allowable for tax relief purposes.
Please be aware though, that the tax rules around allowable expenses are not simple. If there is any uncertainty for you at all about whether something is an allowable business expense, we advise that you contact the HMRC Employer Helpline for further advice.
You should keep a record of all expenses you provide to your employees, your decision making process as to their tax treatment and a note of any guidance you have received from HMRC on the matter.
If HMRC conducts a compliance visit which determines that some expenses you have treated as qualifying for the exemption are not in fact exempt, you may be subject to penalties.
Benefits in kind
You may give your employee certain benefits in kind sometimes called 'perks' or 'fringe benefits'. If you do, there may be reporting obligations for you (if the benefits in kind are taxable), and you may have to pay Class 1A NIC at 13.8%. The benefits will then be treated as taxable income on your employee. There is no employee NIC to pay on benefits in kind.
Not all benefits are taxable and if they are not then you do not have to report them. Benefits that are not taxable are also not subject to Class 1A NIC.
You can find an A to Z list of typical benefits and their treatment on GOV.UK.
Some of the main tax-free ones to note are set out below.
- Board and lodging for care staff
- Certain childcare provision
- Any contributions you make into an approved personal pension scheme for your employee.
- The benefit of a bicycle or cycling safety equipment provided by you for your employee to travel to and from work – the exemption extends to cycle safety equipment too.
- Expenses incurred in providing your employee with a maximum of one health screening assessment and one medical check-up in any year. Medical treatment of up to a maximum of £500, paid by you to enable your employee to return to work after a period of sick leave, is not a taxable benefit either.
- Employer funded costs of work-related training (within the whole range of practical or theoretical skills and competences your employee is reasonably likely to need in their present or likely future jobs with you).
- A Christmas or other annual party which costs no more than £150 a head in total to provide.
- One mobile phone/smart phone provided to your employee, or any line rental or the cost of any private calls for that phone paid for by you. The contract needs to be in your name. Please note that if your employee has their own mobile phone contract but you agree to pay the bills or reimburse the costs, then the rules are different.
- A taxi home provided when your employee works late, if your employee is occasionally required to work later than usual (until 9pm or later), but those occasions are irregular; and by the time they can go home, either public transport between their place of work and home has ceased, or it would not be reasonable in the circumstances for you to expect them to use it (up to 60 journeys in each tax year).
- If you pay your employee ‘mileage’ when they use their own car for business purposes, provided the amount you pay them is below certain limits (up to 45p per mile for up to 10,000 miles and 25p per mile thereafter. The rate for motorcycles is 24p per mile and for bicycles 20p per mile). So, if your employee drove you 25 miles to a business meeting in their own car, then you could give them £10 towards petrol and general car running costs, without having to do anything at all. You should be aware that paying more than the approved amount can cause complex tax, NIC and reporting consequences for you, which are explained on GOV.UK.
⚠️ Remember: 'business mileage' does not generally include travelling from home to work (ordinary commuting). If you pay your employee mileage for ordinary commuting, this is a fully taxable benefit.
(Please note that if your employee uses his own car for qualifying business travel and either gets no payment from you or repayment at below the approved rate, they can claim mileage allowance relief in respect of the difference. Mileage allowance relief is a deduction from earnings which the employee can claim using Form P87 or via their Self Assessment return.)
Certain ‘trivial’ benefits such as tea and coffee provided to employees or seasonal gifts such as a bottle of wine at Christmas are exempt. Since 6 April 2016, broadly any benefit costing less than £50 will be considered ‘trivial’ provided that:
- the benefit is not in the form of cash or a cash voucher;
- it is not given in recognition of work done (or to be done) by the employee (in other words the exemption only applies if the benefit is provided for a non-work reason).
Previously, there was no monetary limit below which a benefit was inevitably to be regarded as trivial – it was a question of common sense and judgement as to the type and the amount of benefits that was trivial. The new system is much clearer. You can find out more about it on GOV.UK.
Employers are expected to keep their own records of trivial benefits made to employees. You can find out more about record keeping for benefits and expenses on GOV.UK.
Taxable benefits include things like company cars, private medical insurance and some cheap or free loans.
Generally, the taxable value (the amount on which tax will be paid by the employee) of a benefit is the 'cash equivalent' value. This is usually the amount it costs you to provide your employee with the benefit. If an employee pays towards any benefit arising that will usually reduce the taxable value and therefore the tax liability. The main exceptions to this rule are company cars or vans, living accommodation and cheap loans where special rules apply.
Unless you payroll your benefits, you should usually notify your employee (and HMRC) of the value of the benefit by 6 July after the tax year end, on form P11D. Many benefits are subject to Class 1A National Insurance contributions (NIC) at the rate of 13.8% (there are no employee NIC on benefits in kind) meaning a form P11D(b) may also be due.
Some common taxable benefits
As mentioned above, there are special rules about how to value specific benefits such as a company car or van, living accommodation and cheap loans, which can be quite complicated, so you may have to seek advice from HMRC. However, they produce a benefits and expenses guide to help employers. You can also find an A to Z list of typical benefits and the treatment on GOV.UK.
We give you a quick overview of the treatment of some common benefits here.
A voucher is any document such as a store gift card or book token that your employee can exchange for goods or services.
If the voucher is for cash or can easily be converted into cash – then the full value for which the voucher can be exchanged (less any amount made good by the employee) is treated as pay and should be taxed under PAYE (it is subject to Class 1 NIC).
For any other non-cash vouchers, the benefit in kind charge will be on the amount you paid for it, less any amount made good by the employee. The value should be included in payroll when received by the employee for Class 1 NIC (not tax) purposes only. The value should be included in the P11D form.
Private medical insurance or treatment
You might pay for your employee to have private medical cover. The benefit to report on the P11D is the cost to you for the cover your employee receives (less any amount made good by the employee).
You might give your employee a loan, for example to help them pay for a season ticket for their travel to work. You may do so at a cheap rate of interest, or interest-free. If so, there may be a taxable benefit if the amount of the loan exceeds £10,000 in the tax year. This is worked out based upon an assumed interest charge at the official rate of interest less any interest your employee has paid.
If the loan is subsequently written off – that is, you decide you do not want your employee to pay the money back – the taxable benefit will be the amount written off.
The benefit of a taxable cheap loan is outside the scope of the system for voluntary payrolling of benefits meaning that employers must always report such a benefit on form P11D.
Employers can tax benefits through their payroll by apportioning the value of the benefit across all paydays in the tax year and adding the value of the benefit to their employee’s taxable income. In this way, the employer deducts tax on the benefits from the employee’s pay throughout the year and therefore does not need to report them on a P11D.
Payrolling benefits provides the opportunity to reduce an employer’s reporting obligations as well as being easier for employees to understand, however it is completely voluntary.
If employers are intending to payroll benefits they must tell both their employee and HMRC before the start of the tax year in question (HMRC may not be able to process changes in-year). This means that if you did not register for voluntary payroll by 5 April 2021, you cannot use it for the 2021/22 tax year and your first opportunity to use it will be the 2022/23 tax year. You will need to notify HMRC and your employee by 5 April 2022 if you decide to do this.
All expenses and benefits can be payrolled, apart from the following:
If you use voluntary payrolling, you will need to tell your employee which benefits were payrolled and the value of those benefits by 1 June following the end of the tax year. There is no set format for these details. You can include this information on your employees’ payslips or in a separate note or statement.
Please note that the P11D(b) process will be unchanged by voluntary payrolling and any Class 1A NIC will still need to be reported and paid after the end of the tax year by 19 July, or 22 July if paying electronically.
Employers will still have to report the values of non-payrolled benefits as normal.
You can find some information on payrolling benefits on GOV.UK.
Users of HMRC’s Basic PAYE Tools (BPT) should check the user guide which contains step-by-step help on the most common functions of BPT, including how use voluntary payrolling.
PAYE Settlement Agreements
A Pay As You Earn Settlement Agreement (PSA) is an optional arrangement that allows employers to settle an employee's tax liability on certain minor or irregular benefits and expenses, rather than going through the normal process of reporting them in form P11D.
There is a special Class of NIC payable in respect of PSAs – Class 1B, which is an employer-only contribution currently set at 13.8% (the same rate as Class 1A).
You can find out more about PSAs, including how to get one, on GOV.UK.