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 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 (such as board and lodging) 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 and reimbursement of employee expenses
Qualifying expenses exemption
Some common taxable benefits
Board and lodging
PAYE Settlement Agreements
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.
For tax years up to and including 2015/16, if you paid or reimbursed an 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, that is, ones that your employee had to incur as part of the job, the employee would then be able claim a deduction from their earnings 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.
Since 6 April 2016, the business expense rules have been simplified and the ‘deduction/dispensation’ approach has been replaced with an ‘exemption’. Here we describe the exemption rules in more detail.
There is a 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.
Claire is a care and support employer and sends her PA, Sandy, to an independent living show in Manchester to check out a new product she is interested in. 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 RTI 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 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, 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 general commuting to and from work and any other private travel as 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 PA.
Other expenses may be covered by the exemption 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 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 will no doubt save employers time and money in administration costs, 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.
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 National Insurance.
You can find an A to Z list of typical benefits and their treatment on GOV.UK.
The main tax-free ones to note are set out below.
- Certain childcare provision, including childcare vouchers.
- 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. 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.
- 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 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 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.
'Business mileage' does not 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. 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 (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 of PA’s may find it useful to know that the nature and typical cost of an annual flu jab means that it should fall within the definition of a trivial benefit and you can pay for one for your PA or give them a voucher for one completely free of tax and without having to contact HMRC at all to tell them about it.
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.
There is no limit to the number of trivial benefits that an employee can receive in a year.
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 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, living accommodation and cheap loans where special rules apply – more on these below.
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 employers’ 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.
As mentioned above, there are special rules about how to value specific benefits such as a company car, 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.
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. Full information on how to calculate the benefit is available on GOV.UK), but the benefit in kind value is based on things like:
- the list price of the car and any accessories;
- the vehicle's carbon dioxide emissions;
- the type of fuel the car uses; and
- the availability of the car.
If the car benefit is not payrolled, you will have to submit form P46 (car) to HMRC giving details when a car is first provided to an employee and when they cease to have a company car. Each tax year, as with other non-payrolled benefits, the cash equivalent of the car benefit for the year has to be included on the P11D at the end of the tax year.
The main thing to note with regard to a company car is that if it has been provided solely for business purposes (that is, 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.
(Similarly, no benefit will arise if the employee has some incidental private use of a pool car. A pool car is essentially a shared vehicle which is mainly used for business purposes. As long as private use is incidental, and the pool car is not normally kept overnight at the employee's residence, no benefit will arise.)
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 – 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.
Employers’ credit cards
If your employee is allowed to use a credit card provided by you, the taxable benefit to report on the P11D 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 to report on the P11D 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.
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.
The provision of living accommodation can be a benefit in kind. We talk about living accommodation below.
If you have a PA who you need to have close by, round the clock, one benefit that may affect you is providing living accommodation.
Living accommodation is an independent living space, perhaps a separate house in the vicinity or a self-contained annex in the garden. Board and lodging – that is, where the employee is provided with meals and somewhere to sleep in the employer's house, is covered later.
Normally the provision of living accommodation is a taxable benefit – as are any related costs, for example 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, 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 generally 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.
HMRC’s more detailed guidance includes a step by step calculation guide should the provision of accommodation actually be taxable.
The tax rules can often mean an unexpected (and unfair) cost for both the employer and employee. Indeed, a few years ago, Office of Tax Simplification (OTS) looked 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 PAs 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.
Please also see our minimum wage section in which we set out how the provision of living accommodation as part of the job can sometimes count towards the minimum wage.
‘Living accommodation’ really only refers to self-contained accommodation that is provided to an employee (that is, with most of the facilities necessary for independent habitation).
Often what we have in a ‘live-in PA’ 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 (for example 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. So since 6 April 2016 there has been 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.
If you provide your PA with board and lodging, you may also find our minimum wage section interesting in which we set out some complexities around the payment of ‘sleep-in’ time.
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 can’t usually process changes in-year). This means that if you did not register for voluntary payroll by 5th April 2019, you cannot use it for the 2019/20 tax year and your first opportunity to use it will be the 2020/21 tax year. You will need to notify HMRC and your employee by 5 April 2020 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.
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.