What Benefits and Expenses Are Taxable?

Introduction

As an employer, you need to understand which benefits and expenses you provide to employees must be reported and taxed. Most benefits count as taxable employment income and require reporting on P11D forms and payment of Class 1A National Insurance, but there are important exemptions that can save you and your employees tax.

What counts as taxable benefits and expenses

All benefits provided to employees or their family members count as taxable employment income unless a specific exemption applies. This is a broad rule that captures many types of provision.

Taxable benefits and facilities include:

• Accommodation – living accommodation provided to employees, including utilities, council tax, and domestic services
• Use of assets – items made available for private use, such as motorcycles, aircraft, yachts, furniture, or television sets
• Company cars and vans – vehicles available for private use, and fuel provided for private motoring
• Gifts and discounted sales – assets given to employees or sold to them below market value, including clothes, electronics, wines, or groceries
• Expenses paid directly – hotel bills, restaurant costs, or other personal expenses paid by you (whether directly or through a company credit card)
• Holidays and entertainment – holiday arrangements, hotel accommodation, and restaurant facilities organised by you
• Sporting and recreational facilities – shooting, fishing, and other leisure activities (though some workplace facilities are exempt)
• Work at employee's home – improvements or work carried out at an employee's residence
• Childcare – though certain forms of employer-supported childcare may be exempt

Special taxing rules apply to certain benefits, including company cars and vans, loans to employees, share incentive schemes, scholarships for employees' children, and income tax paid on behalf of directors.

Which benefits are not taxable

Several important exemptions mean you don't need to report or pay tax on certain benefits:

Annual parties and functions

Annual parties at Christmas or similar functions (such as an annual dinner dance) are exempt if they're open to staff generally and cost no more than £150 per head to provide. If you hold more than one function per year and the total cost exceeds £150 per head, only the functions totalling £150 or less will be exempt. The £150 figure is not an annual allowance – each function must meet the exemption criteria.

Trivial benefits

Gifts to employees are exempt from tax if all these conditions are met:

• The gift consists of goods or a voucher only usable for goods
• The donor is not you (the employer) or someone connected with you
• The gift is not given for particular services performed or anticipated
• You have not directly or indirectly purchased the gift
• The gift cost the donor £250 or less
• The total cost of all gifts from the same donor to the employee or their family during the tax year is £250 or less

Health-screening and medical check-ups

A maximum of one health-screening assessment and one medical check-up per employee in any tax year is exempt. A health-screening assessment identifies employees who might be at risk of ill-health. A medical check-up is a physical examination by a health professional to determine the employee's state of health.

Equipment for disabled employees

Employees with disabilities are not taxable on equipment or services you provide to allow them to take up or continue work (such as a wheelchair or hearing aid). Where equipment is given solely to carry out employment duties, it's exempt. This exemption ensures that no taxable benefit arises when equipment used outside work has significant private use.

Late-night taxis

Taxis from work to home are exempt if you provide no more than 60 journeys per year and all four late-night working conditions are satisfied:

• The employee is required to work later than usual and until at least 9pm
• Such late-night working occurs irregularly (not following an established pattern)
• By the time the employee finishes work, either public transport has stopped or it would not be reasonable to expect them to use it
• The transport is by taxi or equivalent road transport

An employee who gets a taxi once a week (52 times per year) does not qualify unless all conditions are satisfied, even though they've had fewer than 60 taxis.

Other exempt benefits

Additional exemptions apply to:

• Board and lodging for carers in the home of the person they're employed to care for
• Bikes for employees provided through cycle-to-work schemes
• Mobile phones – one mobile phone per employee for personal use
• Car parking spaces at or near the workplace
• Works bus services for employees
• Certain professional subscriptions required for employment

Your reporting and payment obligations

When you provide taxable benefits, you must:

1. Report them on P11D forms – submit these to HMRC by 6 July following the end of the tax year

2. Provide P11D copies to employees – give these to employees by 6 July so they know what's been reported

3. Pay Class 1A National Insurance – you must pay Class 1A National Insurance contributions on most taxable benefits by 22 July (or 19 July if paying by cheque)

You do not deduct tax from benefits through payroll (except where you've chosen to payroll benefits). Instead, HMRC usually collects the tax by adjusting the employee's tax code.

PAYE Settlement Agreements

A PAYE Settlement Agreement (PSA) is a flexible arrangement allowing you to settle tax and National Insurance in one annual payment rather than reporting individual benefits. You can use a PSA for:

• Minor items
• Irregular items
• Items that are impractical to operate PAYE on or value for P11D purposes

Under a PSA, you pay the tax that would normally be due from employees (which must be 'grossed up' to account for different employee tax rates) plus Class 1B National Insurance on both the benefits value and the tax paid. This can simplify administration where you provide many small or irregular benefits.

Sources

• Expenses and benefits: A to Z
• Non-taxable payments and benefits (480: Chapter 5)
• Taxable benefits and facilities (480: Chapter 4)

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.