Guidance

Tax and primary Class 1 National Insurance contributions on expenses and benefits paid by employer

Updated 23 May 2024

There are circumstances where employers agree to voluntarily meet the tax and primary Class 1 National Insurance contributions due on employees’ non-deductible expenses. For example, when an employer pays for travel or accommodation costs for an employee travelling to a permanent workplace.

Reimbursed expenses

When an employer reimburses non-deductible expenses to an employee, who has paid the initial cost themselves, the reimbursed amount is treated as earnings which is subject to PAYE deductions.

If the employer volunteers to pay the tax and primary Class 1 National Insurance contributions deductions on the amount reimbursed, the employer can make an additional payment to the employee. This payment (which is also subject to tax and Class 1 National Insurance contributions) will give the employee broadly the same take home pay — this is called ‘grossing up’.

How to gross up

The following example shows how to calculate the payment to be made to the employee (who is liable at the basic rate) on a grossed-up basis:

An employer pays the employee £567 for the cost of a monthly season ticket for their ordinary commuting journey.

Tax at 20% and primary Class 1 National Insurance contributions rate of 12%, due on £567 = £113.40 + £68.04 = £181.44.

1. Multiply the amount to be grossed up (for example, the original amount of the expense) by 100: £181.44 × 100 = £18,144.
2. Add together the employees’ rate of tax percentage of 20%, plus their percentage rate of primary Class 1 National Insurance contributions of 12%: 20 + 12 = 32.
3. 100 – 32 = 68.
4. Divide the figure at step 1 by the answer at step 3: £18,144 ÷ 68 = £266.82, so the grossed up amount is £266.82.
5. Add the grossed up amount at step 4 to the cost of season ticket: £266.82 + £567.00 = £833.82.
6. Add £833.82 onto the employees monthly pay.
7. Calculate PAYE or enter the grossed-up amount into PAYE software and report the tax and National Insurance contributions on a Full Payment Submission (FPS) through a Real Time Information (RTI) return.

The employer pays secondary Class 1 National Insurance contributions at the rate of 13.8% on £833.82 which is £115.06.

Direct provision of travel and subsistence

When an employer has paid the travel or accommodation provider directly for an employee attending a permanent workplace, this means the employee has been provided with a benefit in kind (BIK). The employee will pay tax based on the value or cash equivalent of the BIK provided.

If the BIK is reported on a P11D, the employer can include an additional payment of earnings calculated on the grossed up basis to cover the tax liability for the employee. This additional payment is subject to tax and Class 1 National Insurance contributions and reported on the FPS on a RTI.

Alternatively, if the employer has elected to payroll BIKs, the amount equivalent to the tax due by the employee for the BIK should be grossed up in the same way as reimbursed expenses. This additional payment must also be accounted for as earnings by payroll and subject to tax and Class 1 National Insurance contributions.

Unlike grossed up reimbursed expenses, Class 1A National Insurance contributions on the original amount or cash equivalent of the BIK should be declared on a P11D(b) return. However, train tickets are treated as travel vouchers and are subject to Class 1 National Insurance contributions through payroll.

The following examples show how grossed up payments should be calculated for hotel accommodation and train tickets where the amount is not deductible, and the employer has elected to payroll the benefits.

Example 1

Employee 1 who is liable at basic rate tax has been provided with hotel accommodation costing £567, this is paid by the employer to the hotel. Employee 1’s employer must declare this amount through the payrolling of benefits process.

The employer wants to make sure employee 1 does not have any costs to pay for the hotel accommodation provided, including any tax liability. To do this, the employer will make a one off, grossed up payment to employee 1, using the following calculation:

Taxable amount of the benefit of hotel accommodation = £567.

Tax of 20% due on the benefit = £ 113.40.

To calculate the ‘grossed up’ amount:

1. £113.40 × 100 = £11,340.
2. 20% (basic rate of tax) + 12% (rate of primary Class 1 National Insurance contributions) = 32.
3. 100 – 32 = 68.
4. £11,340 ÷ 68 = £166.76.

The grossed-up amount which will be added to their wages is £166.76.

This will then be subject to deductions of tax at 20% (£33.35) and primary Class 1 National Insurance contributions at 12% (£20.01), the amount the employee is left with is £113.40. This is the amount of tax payable by the employee on the BIK provided, which leaves them in a tax and National Insurance contributions neutral position.

The employer pays a separate amount of secondary Class 1 National Insurance contributions at 13.8% of £166.76, which is £23.01.

As the benefit of £567 has been payrolled, it will need to be reported on the RTI return as additional income for tax purposes, and reported as a benefit taxed by payroll, but the Class 1A National Insurance contributions of 13.8% (£78.24) due from the employer is reported on the P11D(b) return.

If the employer has not elected to payroll the benefit, the figure of £567 should be reported on the P11D return. The employer can then decide whether to make an additional payment of earnings through the payroll on the grossed up basis calculated as above to cover the employee’s tax.

Example 2

Employee 2 works for the same employer and makes the same journeys as employee 1. In this case the employee has been provided with train tickets also costing £567.

However, employee 2 is liable at the higher rate of tax of 40%. The calculation for a grossed-up payment is as follows:

Cash equivalent of benefit = £567. Tax due on the benefit = £226.80. Primary Class 1 National Insurance contributions due at 2% = £11.34. Total deductions = £238.14. Additionally, secondary Class 1 National Insurance contributions will be due at 13.8% = £78.24.

To calculate the ‘grossed up’ amount:

1. £238.14 × 100 = £23,814.
2. 40% (higher rate of tax) + 2% (rate of primary Class 1 National Insurance contributions) = 42.
3. 100 – 42 = 58.
4. £23,814 ÷ 58 = £410.58.

The grossed-up amount which will be added to their wages is £410.58.

The payment will be subject to tax at 40% (£164.23), primary Class 1 National Insurance contributions at 2% (£8.21), and secondary Class 1 National Insurance contributions at 13.8% (£56.66).

Following this payment, £410.58 is paid to the employee, this will then be subject to deductions of £164.23 and £8.21, so the amount the employee is left with is £238.14. This is the amount of tax and Class 1 National Insurance contributions due by the employee on the BIK provided, leaving them in a tax and National Insurance contributions neutral position.

As the benefit (the provision of train tickets) of £567 has been payrolled, it should be reported on the RTI return as additional income for tax and National Insurance contributions purposes. It should also be reported as a benefit taxed through payroll, as in the example for directly provided hotel accommodation.

If the employer has not elected to payroll the benefit, the figure of £567 should be reported on the P11D return for tax purposes and reported on the RTI return for Class 1 National Insurance contributions purposes only. The employer can then decide whether to make an additional payment of earnings through payroll as calculated above, to cover the employee’s tax bill and the primary Class 1 National Insurance contributions previously deducted.

Considerations when making grossed up payments

There are 2 important points which need to be considered before an employer makes payments to employees to account for chargeable expenses or BIK. These considerations are:

• the additional payment to cover the tax and National Insurance contributions on the benefit will count as earnings and may impact on income-based benefits the employee may be in receipt of outside of their employment
• although the employer is effectively paying for the tax and National Insurance contributions on those benefits on behalf of the employee, if the employee is subsequently entitled to a repayment it will be dealt with as follows:
  • tax — at the end of each tax year, HMRC reviews the records of employees who do not need to send a tax return and makes any repayment due, whereas those individuals who submit a tax return, will receive any repayment to which they are entitled following submission of their return — the repayment will only be made to the employee unless the employee has authorised for it to be made to someone else
  • National Insurance contributions — the repayment of primary Class 1 National Insurance contributions is not an automatic process and is subject to a refund claim — an employer can make a refund claim, unless HMRC is told directly at the time of the claim that the employer has not recovered the primary Class 1 National Insurance contributions from the employee, HMRC will have no way of knowing this when a refund claim is processed and will refund primary Class 1 National Insurance contributions to the employee instead

The examples that have been given use the basic and higher tax rates applicable in England and Northern Ireland in the tax year 2021 to 2022. The Scottish and Welsh Governments are responsible for setting their own tax rates and bands. Employers should use the appropriate tax rates based on an employee’s income tax residency status.