Employee expenses and benefits

Employee expenses and benefits are often part and parcel of an overall employment package. But employers need to be aware of the different taxation and reporting rules depending on the type of expense and benefit.

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What are the main types of benefits and expenses?

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 Gov.uk.

What are the tax implications of employee benefits?

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).

See Gov.uk to find out what has to be paid on the different types of expenses and benefits.

How should these be reported and paid?

Businesses which have registered with HMRC before the start of the tax year can pay taxes on benefits and expenses through the payroll.

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: P11D forms have already been submitted; employees' expenses or benefits have been paid through payroll; or 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, a declaration needs to be completed.

What are the deadlines?

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

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, 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 three years from the end of the tax year to which they relate.

Are there any exemptions?

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 be either paying a flat rate (see Gov.uk for details of this flat rate) to their employees as part of their earnings, or else they must be paying back the employees' actual costs.

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