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Employee expenses and benefits

Employee expenses and benefits are often part and parcel of an overall employment package. However, employers need to be aware of the different taxation and reporting rules depending on the type of expense and benefit.
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Employee benefits range from gym memberships to bonuses. Some of the most common types of benefits and expenses include:

  • pension and retirement benefits schemes
  • company cars and fuel
  • medical insurance
  • travel expenses
  • food and entertainment expenses
  • childcare costs

For a full list of benefits, see the government's website.

Employers may pay any expenses owed to employees directly via their payroll. On payslips, employers may also choose to either:

  • list each expense separately, or
  • combine all expenses and show a taxable or non-taxable amount

The amount of tax which must be paid depends on the expense or benefit; some are tax-free (eg mobile phones and meals in a staff canteen). In general, employers are responsible for reporting and paying taxes on employee benefits as part of PAYE (see below).

Read the government's guidance to find out what has to be paid on the different types of expenses and benefits.

Businesses that have registered with HMRC before the start of the tax year can pay taxes on benefits and expenses through the payroll (known as ‘payrolling’).

A P11D form must be submitted to HMRC at the end of the tax year for each employee who has received expenses or benefits - unless this is being dealt with entirely through the payroll.

Additionally, a P11D(b) form may be required if: 

  • any P11D forms have already been submitted

  • the employees' expenses or benefits have been paid through payroll 

  • HMRC have requested this

P11D(b) forms deal with any Class 1A National Insurance which is required in relation to expenses and benefits. If no Class 1A National Insurance is owed and HMRC has asked you to provide form P11D(b), a declaration can be completed to inform HMRC that you do not owe Class 1A National insurance.

A penalty of £100 per 50 employees will be charged for each month or part month that your P11D(b) form is late. Penalties and interest will also be charged on late payments to HMRC.

PAYE tax and Class 1 National Insurance owed on expenses or benefits must be paid through the payroll every month. Other deadlines are:

  • 6 July - submission of P11D and P11D(b) forms (as well as providing employees with a copy of this information)
  • 22 July - payment of any Class 1A National Insurance owed on expenses or benefits
  • 22 October - payment of tax and Class 1B National Insurance in respect of PAYE Settlement Agreements

HMRC may ask to see evidence of all accounting in respect of employee benefits and expenses, so meticulous records should be kept, including:

  • dates and details of all expenses and benefits provided
  • full information required to calculate amounts
  • any payments contributed by employees to expenses and benefits
  • any correspondence with HMRC

Records should be kept for at least 3 years from the end of the tax year to which they relate.

There are certain routine employee expenses which do not need to be reported to HMRC. These exemptions include:

  • business travel
  • phone bills
  • business entertainment expenses
  • uniforms and tools for work

In order to qualify for these exemptions, employers must either be: 

  • paying a flat rate to their employees as part of their earnings (see the government's guidance for details of this flat rate)

  • paying back the employee's actual costs

An Employment contract may expressly state what expenses are to be reimbursed and under what circumstances. Employers may also have an expenses policy that details the procedure for claiming expenses and in what situations an expenses claim may be denied.

It is important to comply with the employment contract and any existing expenses policy, as any breach may have serious disciplinary consequences, including dismissal, with or without notice.

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