If you provide an employee with anything other than pay, it's called an expense or benefit in kind. Some of these are taxable, others are non-taxable. Non-taxable expenses (otherwise known as allowable expenses) help you reduce your tax bill. Get an accountant to help as expenses get complicated.
What counts as a non-taxable (allowable) expense?
- Generally, non-taxable expenses are anything you or your employees buy that's needed for the running of the business and used exclusively for the business.
- For example: professional charges; general running costs and sundries; premises costs; advertising, promotion and marketing costs. Check the full information on non-taxable expenses in this guide from HMRC on non-taxable expenses: http://www.hmrc.gov.uk/guidance/480.pdf
- You deduct non-taxable expenses from your end of year gross profit when you fill out your end of year tax return, leaving you with a smaller amount of taxable profit to pay tax on.
- Expenses that you can't deduct from your end of year tax bill include: any personal expenses, entertainment (including food or drink for clients); personal drawings; costs which are recoverable under insurance. This is only an outline - check specific items with HMRC.
- Buying equipment or premises and depreciation of assets are not allowable expenses but are covered by the capital allowance system.
- Company cars are a complex area. Talk to an accountant for advice.
What doesn't count as a non-taxable expenses
Benefits in kind and NICs
- Benefits in kind are things like private medical insurance, gym memberships and dental plans.
- You pay Class 1A NICs on the value of any benefit in kind provided to employees earning more than £8,500 annually and for company directors.
- The way you report benefits in kind and pay the NICs due varies depending on how the benefit was paid for.
Keeping records
Throughout the tax year, keep records of:
- Every expense and benefit in kind, what is was for, how much it was and the date it was made.
- Keep receipts for all expenses and benefits in kind.
- Most businesses ask employees to submit a spreadsheet of this information monthly.
Reporting expenses and benefits to HMRC
- You report expenses to HMRC either by filling out P11Ds at the end of the tax year, or by getting a dispensation.
- Getting a dispensation is easier - it heavily reduces your paperwork as it means you don't need to record expenses using P11Ds nor worry about paying tax or NICs on benefits and expenses. A dispensation lasts indefinitely. To qualify for a dispensation, you need to have a system in place whereby no individual can authorise their own expenses. The dispensation application form is called P11DX.
- If you choose to use P11Ds at the end of each tax year, you complete a P11D (Expenses and benefits) form every tax year for each employee earning more than £8,500.
- If an employee earns less than £8,500, you use a P9D instead.
- If you are a director in a company, you need to fill out a P11D for yourself.
- If you are self-employed you don't fill out a P11D for yourself - the information you provide on your self-assessment tax return is sufficient.
Key deadlines for P11Ds:
- P11Ds (and P9Ds) need to be returned to HMRC by July 6.
- Any tax or NICs due on expenses and benefits need to be paid by July 19 (or July 22 if you pay electronically).
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