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View the related Tax Guidance about Benefits in kind

How might non-cash income and benefits be taxed?

How might non-cash income and benefits be taxed?The charge to tax on employment income specifically includes not only cash payments but also ‘any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth, or anything else that constitutes an emolument of the employment’. The definition of benefit is very wide and covers items provided for/to the employee and for their family / household. Types of non-cash earnings with a different treatmentThere are some types of non-cash earnings which have special treatment which are outside the scope of this note. This includes the following items:•non-cash earnings provided through a third party rather than the employer may be subject to the ‘disguised remuneration’ rules. See the Disguised remuneration ― overview guidance note•employers may offer employees shares or share options. See the guidance notes on share schemes (see the Comparison of share schemes guidance note as a starting point)•employers may make contributions to pension schemes on behalf of their employees. See the guidance notes on pension schemes (see the Pension scheme types guidance note as a starting point)This note focuses on other forms of non-cash earnings, often referred to as benefits-in-kind.TaxIn addition to wages and salaries, many reward packages include other items such as the provision of a car, health insurance, childcare or payments of bills such as phones. These are often referred to as benefits-in-kind, BIKs or simply ‘benefits’.The wide definition of benefits in the legislation includes

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

Employment-related securities ― overview

Employment-related securities ― overviewIntroductionShares, or other forms of securities, awarded to employees may be taxed as:•earnings, or•under the special employment-related securities (ERS) rules, which seek to modify the tax position in cases where the tax result that would flow from the particular circumstance does not reflect the full economic value received, or where the Government has determined that it wants a different tax burden or timing to apply.What are securities?The definition of ‘security’ includes stocks and shares of any description but is very wide and also includes items which one would not normally describe as a security, such as insurance contracts and contracts for differences. The definition excludes certain items such as cheques and bank statements (which hardly any-one would think of as such) but, perhaps surprisingly, excludes security options (unless used as part of a tax avoidance arrangement). However securities options are subject to their own specific rules. ITEPA 2003 ss471 – 484 (Chapter 5)The significance of ‘employment related securities’It has long been established by case law that where an employee acquires shares in their employing company and pays less than market value for those shares, the discount is taxable as earnings (as defined in ITEPA 2003, s 62). Charge on acquisitionThe charge to tax on employment income in ITEPA 2003, s 6 relates to:•general earnings•specific employment incomeIn outline, ‘general earnings’ are earnings within s 62 and amounts ‘treated as’ earnings, which includes benefits in kind within the benefits code, while ‘specific employment income’

Pre-owned chattels

Pre-owned chattelsSTOP PRESS: At Spring Budget 2024, the Chancellor announced that the remittance basis would be abolished from 6 April 2025, although this only applies to foreign income and gains arising on or after that date. The remittance basis rules still apply to unremitted income and gains arising before that date but remitted later. For more details, see the Abolition of the remittance basis from 2025/26 guidance note.This guidance note considers the pre-owed asset tax (POAT) as it applies to chattels, where an individual has made a gift, or funded the purchase of a chattel, from which they now benefit. It applies to disposals since March 1986.Chattels include, for example, paintings, antiques, furniture, vehicles, boats, racehorses, jewellery, musical instruments, computers, wines and spirits and collectible items.For discussion of the regime generally, see the Pre-owned asset tax overview guidance note.Chattels are defined as ‘any tangible moveable property (or, in Scotland, corporeal moveable property) other than money’. The conditionsThe residence and domicile conditionsIn order for pre-owned asset tax (also known as POAT) to apply to the individual for any tax year, they must be resident in the UK during that year, see the Residence ― overview guidance note. Where the individual is UK resident but is domiciled outside the UK, the pre-owned asset tax applies only if the asset is situated in the UK. For this purpose, a person is domiciled in the UK at any time if they would be domiciled, or treated as domiciled, in the UK under the

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

How could a termination payment be taxed?

How could a termination payment be taxed?Termination payments are defined in the Termination payments ― overview guidance note.Termination payments can take the form of cash, benefits or both. The payment will either be fully taxable, partially taxable or fully exempt depending on the nature and the amount of the payment.Depending on the circumstances, termination payments can be categorised as one of the following, each with their own tax and NIC treatment:•earnings ― see the Taxation of cash employment termination payments guidance note•benefits in kind ― see the Taxation of non-cash employment termination payments guidance note•restrictive covenants ― see the Taxation of payments for restrictive covenants guidance note•benefits from an employer-financed retirement benefits scheme (EFRBS) ― see the Employer-financed retirement benefit schemes (EFRBS) ― overview guidance note•termination payments (this includes benefits) within ITEPA 2003, s 401 ― see the Termination payments ― overview guidance noteIt is the employer’s responsibility to correctly operate PAYE for termination payments and they, therefore, bear the risk of potential unpaid tax and NIC as well as interest and penalties if the treatment is wrong. As this is a high-risk area, HMRC will prioritise this in compliance work. HMRC guidance on termination payments starts at EIM12800. See also Simon’s Taxes E4.8.See the Termination of employment guidance note, and other notes in the ‘Dismissal’ sub-topic, for a refresher of the essential employment law on dismissal.Analysing a termination paymentBefore deciding how to treat the termination payment for tax purposes, the total payment must

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

Setting up a payroll

Setting up a payrollIt may be stating the obvious, but to be an employer signifies that there are employees (or at least one employee). Depending on the employee(s) earnings, the employer may have to make certain statutory deductions from salaries and wages. Statutory deductions include income tax, national insurance contributions (NIC), student loan deductions (SLD) and attachment of earnings orders (AEO). These statutory deductions are all made via the payroll. The collection system for tax and NIC is called pay as you earn (PAYE).Registering with HMRCEven though there may only be one employee, an employer needs to register with HMRC if the employee(s):•has another job•is receiving a pension (state or occupational)•has earnings equal to or more than the lower earnings limit (LEL) for national insurance•is receiving benefits in kind from the employerRegistration needs to be undertaken before the first payday. The registration process can take up to 30 days and registration cannot be made more than two months before employees are first paid. The timescale for registering should also take account of the time constraints associated with registering for PAYE Online (see below).Registration can normally be done online following the Gov.UK guidance at ‘Register as an employer’. The information needed for registration is detailed in checklist 1 in Checklist ― setting up a payroll.Partnerships and limited companies need to supply further information, as do other types of organisations under certain circumstances. This additional information and the specific circumstances for other organisations can be found integrated

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,

Remittance basis ― overview with employment focus

Remittance basis ― overview with employment focusSTOP PRESS: At Spring Budget 2024, the Chancellor announced that the remittance basis would be abolished from 6 April 2025, although this only applies to foreign income and gains arising on or after that date. The remittance basis rules still apply to unremitted income and gains arising before that date but remitted later. For more details, see the Abolition of the remittance basis from 2025/26 guidance note.Key points•provided certain conditions are met, Overseas Workday Relief (OWR) can be an extremely valuable form of tax relief for non-domiciled individuals who perform employment duties both in the UK and overseas•OWR is only available in the tax year of arrival and subsequent two tax years following a three year period of non-residence•OWR is generally calculated by reference to the percentage of days an individual spends working overseas•a bank account which qualifies for the special mixed fund rules allows for all offshore transfers to be treated as one single transfer for the year and all remittances as one single remittanceIntroduction ― the remittance basisThe default position for employees who are resident in the UK for tax purposes is that they are chargeable to income tax on their worldwide income and gains. Where an individual is not domiciled in the UK, they may be eligible to claim the remittance basis of taxation. For an individual who has been UK resident for a number of years, there are additional rules which may deem them to