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What You Need To Know About Expenses Payments

By: J.A.J Aaronson - Updated: 21 Apr 2015 | comments*Discuss
Expenses Income Tax Employer Benefits In

Many individuals incur costs during the course of their job. These may include fuel expenses, parking, wining and dining of clients, or any number of other potential expenditures. If the individual is an employee of a company, it is highly likely that the company will reimburse their employee for these costs. These reimbursements are known as expenses payments.

Expenses Payments and Benefits in Kind

In the first instance, it is important to note that there is a difference between expenses payments and Benefits In Kind. The latter are 'fringe benefits' offered by employers in addition to an employee's salary. These benefits in kind might include such things as a company car or low-interest loans. Often these are administered through what is known as an Employee Benefit Trust, and are attractive to both employees and employers as a result of the tax deductibility of some benefits.

'Expenses payments', however, describes payments made by an employer to an employee, which are designed to reimburse the employee for any expenses incurred during the execution of their duties. Most frequently these payments cover travel and living expenses.

In the majority of cases, expenses payments are deductible for those who are already taxpayers. However, in order to qualify for these deductions, a number of criteria must be fulfilled. Primarily, the expenses must be incurred 'wholly, exclusively and necessarily' for business purposes. This means, for example, that a mobile phone that is also used by the employee for personal purposes would not qualify for a tax deduction for the employer, although it may be covered as a benefit in kind. Furthermore, not all travel expenses qualify.

Tax Deductibility

In general, expenses payments of these kinds are deductible against the employee's Income Tax Liability and NI contributions. Essentially, this means that no tax needs to be paid on qualifying expenses payments from an employer. The way in which this process occurs, however, may vary depending on the individual employer. Many companies simply make expenses payments to their employees, who then assume responsibility for reclaiming any tax that might be paid on them.

However, HM Revenue & Customs (HMRC) runs a scheme whereby companies who only make expenses payments that will qualify for income tax deductions can receive a dispensation, meaning that the payments will not be taxed in the first place. This minimises the workload for both the employer and HMRC, as well as relieving the employee of the responsibility for reclaiming their tax. It should be noted, however, that Mileage Payments do not qualify for dispensations, regardless of whether or not they will be tax deductible.

For expenses payments that will be taxed, employers have the option to begin an arrangement known as a PAYE Settlement Agreement or PSA with their local Tax Office . Under this agreement the employer will be required to pay Class 1B NICs on any relevant expenses that would otherwise be liable for Class 1 or Class 1A NICs. The PSA is only designed, however, for irregularly paid expenses that cannot otherwise be incorporated into the already established PAYE System.

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