What are the main types of benefits and expenses?
Employee ‘expenses’ and ‘benefits’ are treated as essentially the same thing for legal and tax purposes. This is because many such things (eg reimbursement for meals) could easily be considered to be either paying for an expense or conferring a benefit.
Some of the most common types of benefits and expenses include:
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pension and retirement benefits schemes
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company cars and fuel
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medical insurance
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travel expenses
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food and entertainment expenses
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childcare costs
For a more comprehensive list of potential benefits, see the Government’s website. You can use an Expense policy to set out the types of expenses you will reimburse employees for.
What are the tax implications of employee benefits?
The amount of tax which must be paid depends on the type and value of an expense or benefit. Some types of benefits are tax-free and don’t need to be reported (eg a mobile phone or meals in a staff canteen). Some types of benefits are exempt from tax if they’re worth less than a certain amount (eg incidental overnight expenses incurred by staff away from home for work). In general, employers are responsible for reporting and paying taxes on employee benefits. This is usually done as part of Pay As You Earn (PAYE) (see below).
Read the Government's guidance to find out what tax has to be paid on different types of expenses and benefits.
How should taxes be reported and paid?
Paying through the payroll (ie ‘payrolling’) is often the easiest way to pay out benefits and expenses whilst paying any necessary taxes. Businesses that have registered with HMRC before the start of a tax year can use payrolling.
If employees’ expenses and benefits haven’t been dealt with entirely through payroll during the year, a P11D form must be submitted to HMRC at the end of the tax year for each employee who has received expenses or benefits.
Additionally, a P11D(b) form may be required if:
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any P11D forms have been submitted
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the employees' expenses or benefits have been paid through payroll (ie payrolled), or
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HMRC have requested a P11D(b) form
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.
If you’re required to complete a P11d(b) form and it’s late, 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.
What are the deadlines?
PAYE tax and Class 1 National Insurance owed on expenses or benefits should be paid through the payroll every month. Other deadlines include:
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6 July - reporting of expenses and benefits and Class 1A National Insurance by submission of P11D and P11D(b) forms. Employees must also be provided with a copy of this information
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22 July - payment of any Class 1A National Insurance owed on expenses or benefits (or 19 July if paying by cheque)
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22 October - payment of tax and Class 1B National Insurance in respect of PAYE Settlement Agreements (or 19 October if paying by cheque)
For more information on deadlines, see the Government’s guidance.
What records must be kept?
HMRC may ask to see evidence of all accounting in respect of employee benefits and expenses, so meticulous records should be kept. These include:
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dates and details of all expenses and benefits provided
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full information required to calculate amounts
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any payments contributed by employees to expenses and benefits
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any correspondence with HMRC
Records should be kept for at least 3 years from the end of the tax year to which they relate.
Are there any exemptions?
There are certain routine employee expenses which usually do not need to be reported to HMRC. These exemptions include:
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business travel
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phone bills
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business entertainment expenses
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uniforms and tools for work
In order to qualify for these exemptions, employers must either be:
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paying a flat rate to their employees for these expenses as part of their earnings (see the Government's guidance for details of this flat rate), or
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paying back the employee’s actual costs
Can an employment contract include expenses?
An Employment contract may expressly state what expenses are to be reimbursed (or benefits paid for) and under what circumstances. Employers may also have an Expense policy which details the procedure for claiming expenses, the types of expenses that can be claimed and any limits, and in what situations an expense claim may be denied.
It is important for employees to comply with their employment contract and any expense policy, as a breach may have serious disciplinary consequences (eg dismissal, with or without notice).
Anti-bribery law and entertaining expenses
Entertaining expenses (which include gifts and hospitality) are a unique category of employee expense. They are expenses incurred for the purposes of developing or maintaining a business relationship with a business’ potential or existing clients, partners, or collaborators. For example, the costs of nice client dinners or outings.
Any entertainment that a staff member offers carries the risk of being considered bribery (ie illegally incentivising people to do business with you). Bribery is prohibited by the Bribery Act 2010.
Employers and their employees can generally avoid breaching anti-bribery laws by adhering to a general principle when deciding if a certain entertaining expense is honest and legal: expenses should be reasonable, proportionate to purpose, and made in good faith. They should be connected to a legitimate business activity (eg a dinner held to discuss a potential collaboration) and should be no more lavish than required.
For more information, read Workplace anti-bribery rules.
