Benefits and expenses – the detail
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 HM Revenue and Customs (HMRC) and pay tax and National Insurance 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.
There is some basic information on GOV.UK. However the rules can be quite complicated, so here we go into more detail:
Lower paid employees
Taxable benefits from 6 April 2016
Board and lodging
Payment or reimbursement of employee expenses
For tax years up to and including 2015/16, ‘lower paid employees’ were exempt from most of the benefit and expenses rules. Benefits that were taxable for lower-paid employees included non-exempt employer provided accommodation and some vouchers.
A lower-paid employee was one whose total earnings plus taxable benefits were at a rate of less than £8,500 in a tax year.
With effect from 6 April 2016, the lower paid employee category and P9D return are abolished, all employees are treated in the same way and P11D returns are used, where applicable, for all types of employee.
Taxable benefits, sometimes called 'perks' or 'fringe benefits', include things like company cars, private medical insurance and cheap or free loans.
Generally, the taxable value (the amount that tax will be paid on 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.
Unless you ‘payroll’ your benefits (see below) 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. So if your employee had a taxable benefit in the year to 5 April 2017, you should give your employee a form P11D by 6 July 2017.
The employee then pays income tax on the P11D benefits through an amendment to their tax code (or in another way agreed with HMRC).
Many benefits are subject to employers’ class 1A National Insurance contributions (NICs) at the rate of 13.8% (there are no employee NICs on benefits in kind). Any Class 1A NIC would have to be paid by you by the 19 July after the tax year end (or 22 July if paying electronically). A form P11D(b) detailing any Class 1A National Insurance Contributions (NIC) would be due to HMRC by 6 July following the tax year end. So if you have class 1A NIC to pay for the tax year ended 5 April 2017 you will need to file the form P11D(b) by 6 July 2017 and make the payment by either 19 or 22 July 2017, depending on your method of payment.
There are some rules about how to value specific benefits such as a company car 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.
We give you a quick run-down of the treatment of some common benefits here:
Use of a company car
If you allow your employee to use a car that is owned or leased by you, often called a ‘company car’, and they can use it privately as well as for business purposes, this is a benefit in kind. The benefit value is based on:
- the list price of the car and any accessories;
- the vehicle's carbon dioxide emissions;
- the type of fuel the car uses; and
- the date of registration of the car.
The main thing to note with regard to a company car is that if it has been provided solely for business purposes (i.e. it is used by your employee solely for running errands for you and driving you around) and not for their private purposes, then there is no benefit charge.
If your employee is provided with free fuel for a company car that they can use privately, then there will also be a fuel benefit. There is no taxable fuel benefit if you only pay for fuel for business purposes.
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 – it is treated as pay and taxed under PAYE. For any other non-cash vouchers, the benefit in kind charge will be on the amount you paid for it.
Employers’ credit cards
If your employee is allowed to use a credit card provided by you, the taxable benefit is the amount paid by you for any goods or services your employee buys on that card, unless these are purely for business purposes and you gave your authority for the purchase on your behalf.
Private medical insurance or treatment
You might pay for your employee to have private medical cover. The benefit is the cost to you for the cover your employee receives.
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.
You can find an A to Z list of typical benefits and the treatment on GOV.UK.
Please note that the provision of living accommodation can be a benefit in kind. We talk about living accommodation below.
From 6 April 2016, employers can tax benefits through their payroll by adding the value of the benefit to their employee’s taxable income rather than reporting 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 can’t process changes in-year). This means that if you did not register for voluntary payroll by 5th April 2016, you cannot use it for the 2016/17 tax year and your first opportunity to use it will be the 2017/18 tax year. You will need to notify HMRC and your employee by 5 April 2017 if you decide to do this. Please note that HMRC’s Basic PAYE Tools won’t support benefit payrolling until the tax year 2017/18 in any case.
Employers tell HMRC that they want to payroll benefits by using the online Payrolling Benefits in Kind (PBIK) service. More information about the process and service can be found on GOV.UK.
All expenses and benefits can be payrolled, apart from the following:
- vouchers and credit cards
- living accommodation
- beneficial/interest free and low interest loans
If you use voluntrary 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 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 more detailed information on payrolling benefits on GOV.UK.
Not all benefits are taxable and if they are not then you do not have to report them. The main tax free ones to note are set out below.
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.
Expenses incurred in providing your employee with a maximum of one health screening assessment and one medical check-up in any year. From 1 January 2015, 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. See our website for further information on the ‘Fit to work’ scheme.
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 9 pm 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 anything 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 the doctors in their own car, then you could give them £10 towards petrol, 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.
Certain ‘trivial’ benefits such as tea and coffee provided to employees or seasonal gifts such as a bottle of wine at Christmas are exempt. From 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; and
- the total value of trivial benefits for that employee is less than £300 for the tax year.
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.
You can find an A to Z list of typical benefits and their treatment on GOV.UK.
If you have a care and support worker who you need to have close by, round the clock, one benefit that may affect you is providing living accommodation (covered at Chapter 21 of HMRCs benefits and expenses booklet).
Living accommodation is an independent living space, perhaps a separate house in the vicinity or a self -contained granny annex in the garden. Board and lodging – i.e. where the employee is provided with meals and somewhere to sleep is covered later.
Normally the provision of living accommodation is a taxable benefit – as are any related costs, e.g. Council Tax, upkeep or the provision of furniture.
You may have heard that if the accommodation is provided because it is ‘job-related’ there is no taxable benefit. This is true, however, you should be aware that the rules around what is ‘job-related’ are quite tightly drawn – as we will go on to explain.
Living accommodation, is ‘job-related’ if:
- it is necessary for the proper performance of your employees duties that they reside in the accommodation; or
- the accommodation is provided so that they can perform their duties in a materially better way and they are in the kind of employment in which it is customary for employers in that business to provide accommodation; or
- there is a threat to their security and special security arrangements are in force, and they reside in the accommodation as part of those arrangements..
Although it can be the case that accommodation is not taxable when it is necessary for the proper performance of the employee's duties that the employee should reside in it', in reality HMRC apply some quite strict rules to the types of employments that are covered by such an exemption. HMRC say in their guidance here, that in order for the test to be applicable, it has to be shown that the person has to live in that house AND NO OTHER in order to be able to do their job. The difficulty is that most people would be able to live in say, a different house but one within a certain perimeter, and still do their job.
They also provide a list of the types of jobs they see as covered by these rules here.
As you can see, a care and support employer is not listed by HMRC, therefore there is every likelihood that the accommodation will be taxable as a benefit in kind. However, it is worth pointing out that this is only HMRC’s interpretation of the law and depending on how strongly you feel that your situation falls within the remit of the exemption, you may wish to take this up with them.
Please note that even if HMRC agree that the living accommodation is exempt because it is job-related, other expenses relating to the accommodation, such as the cost of heating and lighting, are taxable (but the taxable benefit is limited to 10% of your employee’s taxable earnings). In addition, if you provide the use of furniture and appliances, there is typically a tax charge at 20% of the cost of the items. Any council tax or water rates you pay on behalf of your employee, or reimburse to them, are exempt.
If the accommodation is a taxable benefit in kind, there will be an income tax charge on the value of the benefit on the employee, and a Class 1A NIC charge on you, the employer.
The value of the accommodation benefit is either:
* the rateable value – if you own the property; or
* the rental value – if you rent the property.
If the employer owns the accommodation and it cost more than £75,000, a further charge applies.
The tax charge on accommodation does not end with the property itself. You may pay other associated costs, for example heating or lighting bills; or may provide the use of furniture and appliances. Usually expenses are taxed at cost (the NIC position can often be troublesome depending on the payment arrangements); whereas the use of furniture and appliances is typically taxed annually at 20% of the cost of the items.
You can find some basic information on the benefit of living accommodation on GOV.UK.
The tax rules can often mean an unexpected (and unfair) cost for both the employer and employee. This is a very topical subject and the Office of Tax Simplification (OTS) have been looking into the complexities surrounding provision of accommodation.
In response to the OTS’s report, the Government issued a ‘call for evidence’ to ascertain how well understood the rules are and to work out whether there is a case for change.
In our response we put forward the recommendation that living accommodation and any associated costs provided for carers by their (care and support) employers are taken out of charge entirely.
This is something we are keeping our eye on and we will post any updates to this website.
‘Living accommodation’ really only refers to self-contained accommodation that is provided to an employee (i.e. with most of the facilities necessary for independent habitation).
Often what we have in a ‘live-in carer’ type situation, rather than ‘living accommodation’ is ‘board and lodging’ which means the provision of the employee's meals, and somewhere to sleep – in a house shared with an employer. Prior to 6 April 2016, the value of board and lodging provided for any employee (other than a lower paid employee) was the cost to the employer of providing the benefit (e.g. food, heat, light etc.).
Following representations made by LITRG that board and lodging should not be treated as a ‘benefit’, in the December 2014 Autumn Statement, a tax and Class 1A exemption for board and lodging was announced for all carers - a write up of which, you can find on the LITRG website.
So from 6 April 2016 there is a tax and NIC exemption on the benefit that arises when a care and support employer provides their employee with board and lodging as confirmed in HMRC guidance.
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 on a train to a doctor’s appointment.
A non-business expense might be something like a £15 taxi fare into town for your employee to watch a movie with friends.
Rules prior to 6 April 2016
For lower paid employees, payment or reimbursement of business expenses did not need to be reported to HMRC. Non-business expense payments or reimbursements totalling less than £25 for the tax year did not need to be reported either.
If you paid or reimbursed a higher paid employee’s expenses (business or non-business), the starting point was that there were various P11D reporting requirements which meant that they counted as taxable income on your employee.
To the extent that they were business expense payments, i.e. one that your employee had to incur as part of the job, the employee would then be able claim a deduction to cancel out the tax charge; or the employer could apply to HMRC for a ‘dispensation’ to remove the obligation to report (and the employee to subsequently deduct) the expenses.
From 6 April 2016 there are no longer any special rules for lower paid employees, meaning all employees are treated the same. In addition the business expense rules have been simplified by replacing the ‘deduction/dispensation’ approach with an ‘exemption’.
Here we describe the new rules in more detail.
Rules from 6 April 2016
There is a new tax and NIC exemption for qualifying business expenses which effectively means that employers will not have to complete a P11D to declare paid or reimbursed expenses and there will be no tax or NIC consequences. Any dispensations agreed with HMRC will no longer apply after 5 April 2016.
You can find the details of the new business expense exemption regime on GOV.UK.
There are several different types of qualifying employment expenses which include:
Special tools and clothing – clothing typically cover items such as uniforms, overalls, protective gloves and boots. (However please note 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. You can find the list on the GOV.UK website.
Travel and subsistence expenses incurred on qualifying business journeys. Some of the rules on this can become quite complicated, and there is another HMRC guidance booklet dedicated to employee travel.
You should be very careful about travel expenses incurred in general commuting to and from work and any other private travel as these are not "allowable" for tax deduction purposes. This means that if an employer is paying or reimbursing this, it will be taxable on the employee.
As noted above, you may be able to reimburse an amount on a tax and NIC free basis if your employee uses their own car for business travel.
Other expenses may be covered, provided:
- the employee is obliged to incur and pay the expenses as holder of the employment, and
- 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 expenses in HMRC’s booklet on expenses and benefits.
HMRC’s detailed, technical, information on deductible expenses starts here.
Although it is anticipated that this new system will save employers time and money in administration costs, the exemption is subject to the condition that the employer satisfies itself that the employee would be entitled to full tax relief on that payment. It will therefore be necessary to check that employees are incurring and paying amounts for exempt expenses, and that a deduction would be allowed for these.
Please be aware though that the tax rules around deductible expenses are not simple. If there is any uncertainty for you at all about the whether something is a deductible 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 deductibility or otherwise and a note of any guidance you have received from HMRC as to the treatment.
If HMRC conducts a compliance visit which determines that some payments are not exempt, you may be subject to penalties.
Employers who pay non-business expenses will still need to put them on form P11D, pay Class 1A NIC etc. as they did before (although please note that from 2016/17 there is the possibility of ‘payrolling’ them).
You can find an A to Z list of typical expenses and the treatment on GOV.UK.