Tax Free Payments and Benefits

Tax Free Payments and Benefits (For Employees & Directors)

Your employer may provide you with benefits or pay expenses or reimburse them, but these expenses payments and benefits are not always taxable. We explain which ones are non-taxable.

Benefits and expenses may be tax free for a number of reasons:

• a PAYE settlement agreement (PSA) is in place – under a PSA, your employer settles, on your behalf, your income tax and NIC due to HMRC on certain types of benefits and expenses payments;
• Statutory exemptions and Extra-Statutory Concessions – the benefits or expenses payments are covered by a concession or exemption; or
• a dispensation was in force – a dispensation was an arrangement your employer could make with HM Revenue & Customs (HMRC) for tax years up to and including 2015/16. It meant your employer did not need to report certain expenses and benefits at the end of the tax year. It also meant that your employer and you did not need to pay any tax or National Insurance contributions (NIC) on items covered by the dispensation.

You do not have to pay tax or NIC on benefits and expenses covered by a PSA (nor by a dispensation for tax years up to and including 2015/16), and if you complete a tax return, you do not need to include them there.

You do not have to pay tax on benefits and expenses covered by concessions or exemptions and there is no need to include them on a tax return.

It used to be very popular for employers to offer employees the chance to salary sacrifice some of their taxable pay for non-taxable benefits. However, the rules now only allow this in respect of certain approved arrangements such as pension contributions and childcare vouchers.

What are the most common exemptions and concessions in relation to benefits provided by your employer?

⚠️ The following categories of expenditure are not normally taxable on the employee.

Qualifying business expenses

Since 6 April 2016, there is an exemption for qualifying business expenses paid or reimbursed by employers. Your employer need not report these to HMRC. Before that date, employers who did not have a dispensation (see above) had to report these to HMRC and then you had to make a claim that these were qualifying business expenses.

Accommodation, supplies and services on your employer’s business premises

Accommodation, supplies and services – for example, ordinary office accommodation, and equipment, phones, typists, messengers, stationery – provided to you on your employer’s business premises and used by you in performing your duties, provided that if there is any occasional private use of the items by you it is not significant.

Employers can provide disabled employees with some equipment to help them to overcome their disability and enable them to work.

Supplies and services provided to you other than on your employer’s premises

Supplies and services – for example, work equipment to use at home, stationery and consumables – provided to you to perform your duties, provided that if there is an occasional private use of the items by you it is not significant.

Employers can provide disabled employees with some equipment to help them to overcome their disability and enable them to work.

Free or subsidised meals

Free or subsidised meals, or a ticket or token used to obtain such meals, if the following conditions are met:

• the meals are provided on your employer’s business premises, or in any canteen where meals are provided for staff generally;
• the meals are provided on a reasonable scale; and either
  • all employees can get free or subsidised meals; or
  • your employer provides free or subsidised meal vouchers for staff who do not get meals.

This exemption does not apply, in the case of an hotel, catering or similar business, to free or subsidised meals provided for you in a restaurant or dining room at a time when meals are being served to the public, unless part of it is designated as being for the use of staff only and you take your meals in that part.

Trivial benefits

From 6 April 2016, broadly any benefit costing less than £50 will not be a benefit-in-kind provided that:

• the benefit is not in the form of cash or a cash voucher and
• it is not given in recognition of work done (or to be done) by you.

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.

There is no limit to the number of trivial benefits that an employee can receive in a year, except where the individual is a director in a close company. In this case, the total value of trivial benefits cannot exceed an annual cap of £300.

Employer contributions into a pension

Employer contributions to an employee’s pension scheme are not taxable on the employee provided they are within certain limits. You can read about the annual allowance and lifetime allowance on GOV.UK. Therefore if an employer pays into either the employee’s occupational pension scheme or into the employee’s personal pension scheme, no taxable benefit will normally arise.

Medical treatment abroad

The cost of necessary medical treatment abroad paid for by your employer, or paid by you and reimbursed to you by your employer, where you fall ill or suffer injury while away from the United Kingdom in the performance of your duties. The cost of providing insurance for you against the cost of such treatment is also non-taxable.

Health screening and medical check-ups

Expenses incurred in providing you with a maximum of one health screening assessment and one medical check-up in any year.

‘Health screening assessment’ means an assessment to identify employees who might be at particular risk of ill-health.

‘Medical check-up’ means a physical examination of the employee by a health professional for, and only for, determining the employee’s state of health.

This exemption does not cover medical treatment. From 1 January 2015 your employer is able to pay up to £500 of medical treatment for you without that being a taxable benefit for you provided that certain conditions are satisfied:

• you must have been absent from work through sickness for at least 28 days as a result of injury or ill-health; and
• this treatment is recommended to assist your return to work.

Eye tests and corrective glasses are not taxable where an employee uses a visual display unit (VDU), and the provision of a test and glasses is required by Health and Safety regulations.

Certain living accommodation

The cost of living accommodation, also known as job-related accommodation, provided for you if:

• it is necessary for the proper performance of your duties that you reside in the accommodation, but see note (a) below; or
• the accommodation is provided so that you can perform your duties in a materially better way and you are in the kind of employment in which it is customary for employers in that business to provide accommodation, but see note (a) below; or
• there is a threat to your security and special security arrangements are in force and you reside in the accommodation as part of those arrangements.

Note: (a) If you are a company director and the company, or an associated company, provides you with accommodation, you can only seek exemption in these circumstances if:

• you have no material interest in the company; and
• either you are a full-time working director; or
• the company is non-profit making; or
• is a charity.

If your living accommodation is exempt, any council tax or water rates your employer pays on your behalf, or reimburses to you, are also exempt.

Other expenses relating to the accommodation, such as the cost of heating and lighting are taxable if they are paid by your employer, but the taxable benefit is limited to 10% of your taxable earnings.

Incidental overnight expenses

These are payments that your employer might make for personal expenditure, up to certain limits, when you stay away from home for at least one night during a business journey, for example, buying newspapers, laundry, phoning home. The maximum amounts that may be paid without any tax consequences are:

• £5 a night for each night away during business journeys anywhere
  in the UK;
• £10 a night for each night away, during business journeys outside the UK.
  If the maximum for a business journey as a whole is exceeded, the full amount paid for that journey is taxable.

Travelling and subsistence expenses following strike disruption

Reasonable expenses reimbursed to you, or paid on your behalf, if, because of dislocation of public transport by strikes or other industrial action, you:

• stay overnight in hotel or other accommodation; or
• incur extra costs in travelling to and from work.

Disabled people’s cost of travel between home and work

Assistance with the cost of travelling between home and work, or to and from a place where work-related training is provided, including the reimbursement of travel expenses, given to people with a substantial and long term disability.

Certain retraining costs

Costs met by your employer, if you are about to leave your employment, or have left within the previous year, to enable you to attend certain courses of retraining intended to help you get another job.

If you have not left by the time you start the course, you must leave within two years of finishing it for the exemption to apply. The exemption is withdrawn if you are re-employed by the same employer in the two years following the end of the course.

The exemption is only available if you have been employed by your employer for at least two years up to the time you begin the course, or at the time the employment ceased.

Courses must:

• teach or improve skills which will help you to find new work, and be entirely devoted to those objectives; and
• last no more than two years.

The opportunity to attend courses must have been given to all employees in a similar position.

Exempt expenses are:

• fees for the course;
• fees for examinations taken during or at the end of the course;
• the cost of essential books; and
• the full cost of travelling to attend the course, plus related subsistence expenses.

Employer-funded or employer-reimbursed training

This exemption covers the costs borne by your employer of work-related training within the whole range of practical or theoretical skills and competencies you are reasonably likely to need in your present or likely future jobs with your employer. The exemption extends to:

• training activities such as first aid and health and safety in the workplace;
• employee development schemes;
• activities intended to develop skills you need in leadership; and
• any training that is provided by a third party rather than your employer.

All the ways in which training can be delivered are covered, including full-time and part-time training, internal training courses run by your employer, courses that are run externally or by a third party, and courses that comprise any mixture of these.

The tax exemption also covers:

• travel and subsistence expenses, to the same extent as if you were undertaking employment duties while training;
• other incidental costs, such as additional childcare expenses directly related to you undertaking the training in question;
• costs that relate to examinations and registration of qualifications; and
• costs of multimedia and distance learning aids, practical course materials and books.

Training, or training-related travel and subsistence, which is provided as entertainment, recreation, reward or an inducement, remains taxable.

Any asset provided to you or for your use is also taxable unless the asset is provided or used purely for training, or for training coupled only with use in the performance of the duties of your office or employment.

Long service awards

Long service awards made to directors and employees as testimonials to mark long service where the service is not less than 20 years and no similar award has been made to the same employee within the previous 10 years.

These have to be:

• things or articles, rather than cash; or
• shares in an employing company or another company in the same group.

The cost of the award must not exceed £50 for each year of service.

Suggestion schemes

Awards made to you under a suggestion scheme where the following conditions are met:

• your employer’s scheme is open on the same terms to:
  • all their employees; or
  • a particular category of them, for example, a scheme open to all employees in a particular geographical area will satisfy this condition;
• the suggestion must relate to the activities carried on by your employer;
• the suggestion for which the award is made is outside the scope of your normal duties. The test is that, taking account of your experience, you could not reasonably have been expected to put forward such a suggestion as part of the duties of your post; and
• the suggestion was not made at a meeting held for the purpose of proposing suggestions.

The exemption applies to two types of awards for suggestions:

a) Encouragement awards

An encouragement award is one that is made for a suggestion that has some special merit or reflects praiseworthy effort on the part of the person making the suggestion. The permitted maximum for an encouragement award is £25. If the encouragement award exceeds £25 the excess over £25 is taxable.

b) Financial benefit awards

There are additional conditions applying to financial awards:

• Awards can only be made following a decision to implement the suggestion. The decision to make an award must be based on the likelihood of improvement in efficiency or effectiveness. The likely financial benefits must be considered, as must the importance of the suggestion in relation to the employer’s business;
• The amount of the award cannot exceed:
  • 50% of the expected first year net financial benefit; or
  • 10% of the expected five-year net financial benefit
    subject, in each case, to an overriding maximum of £5,000. Where an award exceeds £5,000, the excess over that figure is taxable.
• If two or more employees receive an award in respect of the same suggestion, the exempt amount is divided among them.

Goodwill entertainment

This might apply if a business provides entertainment to its customer’s employees. Providing goodwill entertainment for an employee, or for a member of the employee’s family or household, provided that:

• the person providing the entertainment is neither the employer, nor a person connected with the employer; and
• neither the employer nor a person connected with the employer has directly or indirectly procured the provision of the entertainment; and
• the entertainment is not provided either in recognition of particular services that the employee has performed in the course of the employee’s employment or in anticipation of particular services that are to be performed by the employee in the course of the employee’s employment.

Car, motorcycle and bicycle parking

The provision of car or motorcycle parking space or facilities for parking bicycles, at or near the employee’s place of work.

Electricity provided for electrically propelled company cars and vans

The costs of providing the electricity, including the cost of providing a charging point at the employee’s home for a company car or van. The cost of providing the electricity is only free from tax if the employer pays for all the electricity directly. If, instead, the employer reimburses the employee and that includes the cost for any private mileage, there will be a charge to tax and NIC on the whole amounts of the reimbursement although the employee will be able to claim tax relief for the business mileage.

Certain gifts

This might apply if a business makes small gifts to its customer’s employees. Certain gifts from third parties are not taxable if all these conditions are satisfied:

• the gift consists of goods or a voucher or token only capable of being used to obtain goods; and
• the person making the gift is not your employer or a person connected with your employer; and
• the gift is not made either in recognition of the performance of particular services in the course of your employment or in anticipation of particular services that are to be performed; and
• the gift has not been directly or indirectly procured by your employer or by a person connected with your employer; and
• the gift cost the donor £250 or less, and the total cost of all gifts made by the same donor to you, or to members of your family or household, during the tax year is £250 or less.

Some other gifts are not taxable:

• Any gift from your employer is taxable unless your employer is an individual and makes the gift in the course of family, domestic or personal relationships unless it is a trivial benefit as noted below. Also see the last point in this section for gifts made before 6 April 2016.
• Trivial benefits. Examples may include items your employer makes available to all employees on similar terms, such as, tea and coffee, or small gifts at Christmas like a bottle of wine.
• Before 6 April 2016, if you earned less than £8,500 a year and were not a director, a gift to mark a special occasion, such as a wedding present, which was not a reward for your services was not taxable.

Work to home travel provided when you work late or when sharing arrangements are disrupted

The cost of transport, for up to 60 journeys in each tax year, your employer provides to take you home if:

• you are occasionally required to work later than usual, and until 9pm or later, but those occasions are irregular; and
• by the time you can go home, either public transport between your place of work and home has ceased, or it would not be reasonable in the circumstances for your employer to expect you to use it; or
• you normally travel to and from work in a car shared with other employees, and you cannot get home in the shared car because of unforeseen circumstances that could not reasonably have been anticipated.

Work buses and subsidies to public buses

The benefit of travel between home and work in a bus or minibus that your employer provides may be non-taxable. The following conditions must be met:

• the bus or minibus has a seating capacity of nine or more;
• the bus is available to all employees;
• substantially the whole use of the service is by employees and their children.

Or if your employer pays a subsidy to a public bus service so that you travel at a reduced or no cost on that route, provided that the service is available to all employees.

Christmas or other annual party

This includes annual parties or alternative functions of a similar nature, such as a Christmas dinner or a summer party, which are open to staff generally and which cost no more than £150 a head in total to provide. Recognising the difficulty of bringing employees together safely in the midst of the coronavirus pandemic, HMRC have confirmed that the exemption will apply to the costs associated with virtual parties in the same way that it would for traditionally held parties

Sports facilities

The exemption applies to sports facilities generally available to all employees and members of their families and households.

This does not apply to facilities:

• available to the general public; or
• consisting of, or provided in association with, overnight or holiday accommodation; or
• provided on domestic premises; or
• consisting of mechanically propelled vehicles or vessels such as cars, motorboats and aeroplanes.

Working Rule Agreements

Certain elements of travelling and subsistence allowances paid under Working Rule Agreements to some employees in the construction and allied industries are paid free of tax under an agreement with HMRC. Any allowances or part of allowances covered by this agreement will not be shown on form P11D and should not be included on your tax return.

Welfare counselling

Welfare counselling made available to all employees generally on similar terms is exempt from tax. For this purpose, welfare counselling does not include:

• any medical treatment;
• advice on finance or tax, other than debt counselling;
• advice on leisure or recreation; or
• legal advice.

Mobile phones and smartphones

There is no charge to tax on one mobile phone provided to you, or any line rental or the cost of any private calls for that phone paid for by your employer. The contract needs to be in your employer’s name.

One mobile phone may consist of two connections, for example, two SIM cards, to the same number, one in a handset and another in a hands-free phone in a car. However, two connections to two different numbers represent two mobile phones.

A mobile phone provided to a member of your family or household is taxable in all circumstances, unless the family or household member is provided with the phone as an employee in their own right.

If an employer provides a mobile phone to you solely for business use, and private use is not significant, there is no charge to tax. Consequently, it is possible for an employer to provide two, or more, mobile phones without creating a tax charge, if one or more is provided solely for business use – and private use is not significant – and only one is provided for private use.

But if two mobile phones are provided for private use, or for mixed private and business use, only one is exempt. It is up to you and your employer to decide which one is exempt and which one is chargeable as a benefit.

Smartphones fall within the meaning of mobile phones.

HMRC accept that the provision of one such device to an employee can be exempt from a benefit in kind charge even where there is private use. This exemption does not extend to other devices such as iPads, PDAs and tablets.

Bicycles and cycling safety equipment

If your employer lends or hires bicycles or cycling safety equipment to their employees, the exemption applies if:

1. The bicycles or equipment are available to all employees – this does not mean that every employee has to be provided with a bicycle or equipment, just that the offer of cycles or equipment is open to all employees if they wish to take it up; and
2. The bicycles or equipment are used mainly for ‘qualifying journeys’ as described below.
   A journey only counts as a qualifying journey in two situations:

• if all or part of the journey is between home and workplace; or
• if all or part of the journey is between workplaces.

Other use of the cycle, for instance pleasure use or use by members of your family will not disqualify the exemption provided that the other use is not the main use of the bicycle.

You are not expected to keep detailed records of time spent cycling or miles travelled for the purpose of this exemption.

The exemption also covers the provision of a voucher for hiring bicycles and equipment.

Transfer of ownership of the bicycle from the employer to you

If ownership of the bicycle is transferred to you after a period of use during which the exemption applied, the transfer is a taxable benefit and the cost of that benefit is the market value of the bicycle at the date of transfer.

The exemption from tax and NIC for loaned or hired cycles only applies where there is no transfer of the property in the cycle or equipment in question. This means that the exemption ceases to apply if ownership is transferred to you.

Similarly, the exemption does not apply if any agreement builds in from the outset an automatic transfer of ownership to you at the end of the hire period.

Using your own bicycle for work

Some employees are paid an allowance for using their own bicycle for business travel. Their employer might pay them per mile to do so, for example your employer might pay you 10p for every business mile that you cycle.

You can receive up to a maximum amount per mile without having to pay any tax. This is the Approved Mileage Allowance Payment (AMAP). The AMAP rate for using your own bicycle is 20p for each business mile. If your employer pays you 30p per mile, say, you have to pay tax and NIC on the extra 10p a mile you get above the approved rate.

If you get paid less than the approved rate then you can claim tax relief on the difference, assuming that your income is high enough that you pay tax.

Removal expenses

Your employer can meet your removal or relocation costs, up to a maximum of £8,000 per move, if certain conditions are met.

The conditions include:

• you must be moving to take up a new job or your employer has transferred you;
• the expenses relate to the sale of your old home, the purchase of your new home, removal costs, travel and subsistence costs or a bridging loan;
• you must incur the expenses before the end of the tax year following the one in which the relocation occurred;
• your new home must be within reasonable commuting distance of your new place of work, and your old home must not be within reasonable commuting distance of your new place of work.

Goods provided at a discount

If your employer sells you goods, for example, unsold bakery products, at a discount, provided the amount you pay is at least the cost incurred by your employer in making the goods, there is no taxable benefit.

Mileage allowances

If your employer pays you ‘mileage’ when you use your own car for business purposes, provided the amount they pay you is below certain limits there is no taxable benefit.

Where can I find more information?

There is a list of Extra-Statutory Concessions in force on GOV.UK.

You can read more about PAYE settlement agreements on GOV.UK.

GOV.UK also contains an A to Z list of expenses and benefits, which explains the tax and NIC treatment. Although this is aimed at employers, it will also be useful to employees.

There is a quick guide to employment benefits aimed at employees on GOV.UK.

HMRC’s technical information on employment benefits can be found in their Employment Income Manual starting at page EIM21600.