View the related Tax Guidance about Taxable benefit
Common exempt or non-taxable benefits
Common exempt or non-taxable benefitsGenerally, benefits provided to an employee are taxable unless there is a specific exemption or other rule that means they are not chargeable to tax. See the How might non-cash income and benefits be taxed? guidance note. This note looks at those benefits which are not taxable.ExemptionsThe main exemptions for employee benefits are in ITEPA 2003, ss 227–326B (Pt 4). For examples which are exempt, there is no P11D reporting requirement, no tax due and no Class 1A NIC due.Below is an alphabetical list of the main exempt benefits, a brief description of each and a link to the relevant guidance note on the subject:BenefitBrief details of exemption requirementsRelevant guidance noteAnnual parties and similar annual social eventsThe total cost per head of all such functions in the tax year is less than £150 including VATAnnual partiesArmed forces’ travel to take leaveCovers any form of travel provided to enable members of the armed forces to go on or return from leaveArmed forcesBicycles (provision of bicycles with no transfer of the asset to the employee)Bicycles have to be made available to employees generally (not all have to take up offer) and bicycles provided have to be mainly used for travel to / from work or for business. Exemption extends to cycle safety equipmentBicyclesBoard and lodging for home care workersThis covers reasonable scale of board and lodging provided for carers in the home of the person they are caring
Taxable state benefits
Taxable state benefitsThis guidance note sets out which state benefits are taxable.The majority of state benefits (also called social security benefits) are managed by the Department of Work and Pensions (DWP) via the Jobcentre Plus.Some benefits are dependent on a national insurance contribution record (and different classes of national insurance provide different benefit entitlements) and some are not.More information on the range of state benefits that may be available to individuals in the UK can be found on the GOV.UK website.For benefits in Scotland, see Social Security Scotland GOV.SCOT. For the position on welfare benefit in Wales, see GOV.WALES.The Scotland Act 2016 devolved significant welfare powers to the Scottish Parliament, including the right to create new benefits and responsibility for some existing benefits. The tax status of benefits is determined by the UK parliament. The position in Wales is under review, with the majority of benefits administered at UK level, though the Welsh government and local authorities in Wales continue to administer some grants and allowances. For a review of the policy position, see Wales centre for public policy.The primary legislation on taxable state benefits is ITEPA 2003, ss 656–662.This guidance note does not cover the state pension. For details, see the State pension guidance note.Table of taxable UK state benefitsThe following UK state benefits are taxable and should be reported in boxes 13 to 16 on page TR3 of the main tax return and guidance notes (or boxes 4.3 to 4.6 of the short tax return, see short
Non-taxable state benefits
Non-taxable state benefitsThe majority of state benefits (also called social security benefits) are managed by the Department of Work and Pensions (DWP) via the Jobcentre Plus.More information on the range of state benefits that may be available to individuals in the UK can be found on the GOV.UK website.For benefits in Scotland, see Social Security Scotland on GOV.SCOT. For the position on welfare benefit in Wales, see GOV.WALES. The Scotland Act 2016 devolved significant welfare powers to the Scottish Parliament, including the right to create new benefits and responsibilty for some existing benefits. The tax status of benefits is determined by the UK parliament. The position in Wales is under review, with the majority of benefits administered at UK level, though the Welsh Government and local authorities in Wales continue to administer some grants and allowances. For policy position in Wales, see Wales centre for public policy. Table of non-taxable UK state benefitsFor completeness, this table is based on ITEPA 2003, s 667 which includes some benefits which are no longer in payment.The following UK state benefits are not taxable and should not be reported on the tax return:State benefitPayable underAdult disability payment (from 2021/22 onwards)SS(S)A 2018, ss 24, 31Attendance allowanceSSCBA 1992, s 64SSCB(NI)A 1992, s 64Back to work bonusJobseekers Act 1995, s 26JS(NI)O 1995, Art 28Bereavement paymentSSCB(NI)A 1992, s 36Best start grantSS(S)A 2018, ss 24, 32Child benefitSSCBA 1992, s 141SSCB(NI)A 1992, s 137Child’s special allowanceSSCBA 1992, s
Tax relief for pension contributions
Tax relief for pension contributionsThe completion of boxes 1 to 4 at the top of page TR4 of the main tax return allows a taxpayer to claim tax relief on pension contributions made in the tax year.Most contributions to registered pension schemes are paid net of basic rate tax relief (via a relief at source scheme), so the only additional relief sought by entry on the tax return is relief at higher rates of tax.For Scottish taxpayers, relief at source is at the Scottish basic rate. From 2017/18 onwards, due to the divergence in the Scottish bands and rates from the rest of the UK, multiple bands need to be extended where pension contributions are paid to relief at source schemes. Scottish tax bands need to be extended for calculating tax on non-savings, non-dividend income. UK tax bands need to be extended for calculating tax on savings and dividend income of Scottish taxpayers. This is discussed further below.Contributions are paid gross to occupational schemes that use a net pay arrangement.For the meaning of a registered pension scheme, relief at source scheme and net pay arrangement, see the Pensions glossary of terms guidance note.The tax relief available for pension contributions is summarised in the Flowchart ― tax relief for contributions to a UK registered pension scheme.Conditions for tax relief to be claimedRelevant UK individualTo obtain tax relief on pension contributions, the scheme member must be a relevant UK individual. This means that the individual must:•have relevant UK earnings chargeable
Annual parties
Annual partiesIntroductionMany employers provide social functions to their staff. Often this will include some sort of annual event, usually taking place in the summer or at Christmas. See also Simon’s Taxes E4.741A. HMRC guidance is at EIM21690.The amounts incurred by the employer in respect of the social function are taxable unless there is an exemption from tax as it is considered a benefit to the employees attending.Exemption for annual parties ― qualifying eventsThere is an exemption from tax and NIC in ITEPA 2003, s 264 where the employer provides employees with a social function and a number of conditions are met:•the function is an annual party•the event is available to all employees in the business, or all employees at one location where the employer has multiple locations•the cost per attendee does not exceed a set amount ― currently £150Although the legislation includes the term ‘annual’, HMRC has not to date expected the employer to hold the same event every year. However, the event should be of an annual nature such as a Christmas party or summer barbecue. Events which, by their nature, are one-off events will not be covered by this exemption. For example, if an employer is having a celebration because it has been in business for 50 years, this would not be classified as annual for the purposes of these provisions.For the treatment of social events which are not annual parties, see the Entertainment ― staff
Utilities, council tax and other bills in accommodation
Utilities, council tax and other bills in accommodationThe payment of an employee’s council tax or utility or other bills is usually linked to the provision of living accommodation to the employee.Whether or not the payment of council tax or utility bills is treated as a taxable benefit depends on whether the reason for the provision makes it an exempt benefit under specific legislation.Payments in respect of gas and electricity made by an employer in relation to employer-provided accommodation are always taxable. However, how and why the benefit is provided to the employee determines both the value of the benefit and reporting requirements.Council tax and utility bills ― exemptionsWhether or not the payment of council tax or utility bills on behalf of the employee constitutes a taxable benefit depends on why the amounts have been paid.If the payment of council tax does not fall into one of the exemptions below then the full amount is taxable. The section on ‘reporting requirements’ below sets out how it should be reported and taxed.Exemptions applicable to council tax or utility billsThe payment of council tax or utility bills (specifically council tax, water charges or sewerage charges) is not taxable if it is provided in connection with living accommodation which is exempt from tax either as job-related accommodation or due to a security threat; this is confirmed by HMRC guidance at EIM11332. Broadly, there are two exemptions:•job-related accommodation ― where either the accommodation is necessary for the proper performance of the duties, or
Allowable deductions for employee-related expenses
Allowable deductions for employee-related expensesThis guidance note covers the tax treatment of some common types of trading expenditure relating to employees. Some of these are disallowable under general principles, for example the wholly and exclusively test or capital versus revenue expenditure. Some are disallowed under specific statutory rules. For guidance on these, see the Adjustment of profits ― overview guidance note. In this guidance note, unless otherwise stated, references to ITTOIA 2005 are relevant for sole traders / partners and references to CTA 2009 are relevant for companies.Salaries and wagesThe costs of employing staff is typically allowable provided it meets the criteria of being ‘wholly and exclusively’ for the purposes of the trade. This includes wages or salary, plus any benefits in kind. Where remuneration is excessive, it is possible that a deduction may be challenged on the basis of not being for the purposes of the trade. This will normally only be applicable to remuneration of individuals who are connected to the business in some way.When considering the level of remuneration, the whole package of remuneration, comprising salary, wages, benefits in kind, pension contributions and other perquisites must be considered. This does not include dividends received.It is rare for remuneration to be disallowed on the grounds that it is capital. However, it might apply where employees have devoted significant time to the creation or acquisition of capital assets. This is most likely to relate to situations where construction workers perform work on their own premises or legal advisers
Season tickets and bus services
Season tickets and bus servicesIntroductionEmployers may provide employees with assistance towards meeting the costs of public transport which the employee uses for commuting to and from their permanent place of work. In the majority of cases, this type of benefit would be subject to tax and NIC in full as well as reporting consequences. However, there are some common ways that an employer may assist an employee with their commuting costs that are exempt from tax and NIC. These are discussed below.See Simon’s Taxes E4.715A.Season ticketsThere are a number of ways in which an employer might provide assistance in the purchase of an annual travel season ticket to an employee. The method of provision will dictate the tax, NIC and reporting consequences which are set out below.See Simon’s Taxes E8.235.Employer provides a loan for a season ticketIt is relatively common for an employer to make loans available for the purchase of season tickets. Generally, these will be within the exemption for loans which do not exceed £10,000. See the Loans provided to employees guidance note for details.Employer provides a season ticket to the employeeIf an employer provides either a season ticket or equivalent vouchers as a benefit, then this will be a taxable benefit. The tax, NIC and reporting obligations are as follows:•the value of the benefit should be included in section C of the P11D•the value of the benefit is added to the employee’s earnings and included in payroll. Class 1 NIC, but not income tax,
Entertaining, parties, gifts and awards ― overview
Entertaining, parties, gifts and awards ― overviewWhen an employee is provided with entertainment, a gift or an award as a result of their employment, the default position is that a taxable benefit arises. Assuming no exemption applies, the employer reports the award on the P11D. In the absence of any other calculation methodology provided by legislation, the employee will be taxed based on the cost of the award to the employer or provider, see the Cost to provider and money’s worth guidance note.How is PAYE applied to these benefits?As entertaining, parties, gifts and awards include a wide variety of different benefits, the PAYE treatment will always be guided by:•what is provided•how it is provided•liability for costs•whether items are paid for directly or reimbursedAs a result, the legislation is not set out in a way that will guide you to easily find
Entertainment ― staff
Entertainment ― staffIntroductionIf an employer provides any staff entertainment for their employees, a taxable benefit may arise on that provision under the Benefits Code. See Simon’s Taxes E4.601. Staff entertainment could be any function, event, party or meal which an employer provides to an employee. HMRC guidance starts at EIM32615. Entertaining eventsThe first thing to consider is whether the expenditure incurred by the employer is exempt from tax anywhere else in the tax legislation. This may be because the event is a qualifying annual party, the meal is covered by travel and subsistence rules, or the event is a training event. It is also worth considering whether the entertainment is trivial in nature and can be exempted under the trivial benefits legislation. This could be the case where there is a small office
Tax legislation doesn't stand still, and neither should you. At Tolley we're constantly building tools to give you an edge, save you time and help you to grow your business.