Non-deductible and non-exempt expenses

18 October 2016

18 October 2016

From 6 April 2016 any expenses you reimburse to your employees that are fully deductible from their earnings are no longer subject to tax and National Insurance contributions (NICs), provided they are not part of a relevant salary sacrifice arrangement.

There is no need for employers to include them on P11D and for the employees to submit deduction claims to HMRC. Dispensations no longer apply. Employers who wish to pay the tax and NICs on non-deductible expenses can still agree PAYE Settlement Agreements with HMRC.

For the tax year ending 5 April 2017 expenses payments that are not fully deductible should not be reported on form P11D, but instead should be treated as earnings and the full amount should be subject to tax and Class 1 NICs.

For mixed expense payments (for example, home telephone rental) if you can clearly identify the allowable expense amount at the time of payment, only the non-exempt amount will need to be treated as earnings and subject to tax and Class 1 NICs through the payroll.

If the non-exempt amount is not clearly identifiable at the time of payment you should treat the full amount as earnings and deduct tax and Class 1 NICs accordingly. Your employees can then claim tax relief for the exempt amount related to business use in the normal manner.

Where a benefit is provided that would have previously been included in a dispensation because a fully matching deduction is available, and it is not provided under a relevant salary sacrifice arrangement, the exemption applies in the same way as to paid or reimbursed expenses. If the benefit is not fully matched by a deduction, the full value of the benefit should be reported in the normal way.

For more detailed information please see our guidance – Exemption for amounts which would otherwise be deductible.

Further information relating to the end of year reporting of expenses and benefits, including how to deal with items that have not been reported via payroll during the year, will be published in the February edition of Employer Bulletin.

This information was published in the Employer Bulletin: October 2016.