PAYE72028 - PAYE Operation: payments for PAYE purposes: how to gross-up
There may be circumstances where employers agree to voluntarily meet the tax and primary Class 1 National Insurance contributions (NICs) due on employees’ non-deductible expenses. For example, when an employer wants to pay for the 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, the amount reimbursed is treated as earnings and should be subject to PAYE deductions.
If the employer wants to voluntarily meet the tax and primary Class 1 NICs deductions payable 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 NICs) puts the employee in broadly the same position with the same take home pay, as if the employee had never been charged tax and Class 1 NICs on their reimbursed expenses for travel or accommodation costs. This is called ‘grossing up’.
How to Gross-up
The following example is the method for calculating the payment to be made to the employee (who is only liable at England and Northern Irish basic rate of tax) 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 NICs rate of 8% due on £567 = £113.40 + £45.36= £158.76
1) Multiply the amount to be grossed up by 100 (the original amount of the expense) - £158.76 x 100 = £15,876
2) Add together the employees’ rate of tax percentage plus their percentage rate of primary Class 1 NICs - an employee only liable at basic rate tax (20%) with primary Class 1 NICs rate of 8% would be 20 + 8 = 28
3) 100 – 28 = 72
4) Divide the figure at step 1 by the answer at step 3 - £15876/72 = the grossed up amount £220.50
5) Add the grossed up amount at step 4 to the cost of train fare £220.50 + £567.00= £787.50
6) Add £787.50 onto the employees monthly pay
7) Calculate PAYE or enter that amount into PAYE software and report the tax and NICs on a Full Payment Submission (FPS) through a Real Time Information return (RTI)
The employer pays secondary Class 1 NICs at the rate of 13.8% on £787.50 which is £108.67
Direct Provision of Travel and Subsistence
Where non-deductible expenses are paid directly by the employer to the travel or accommodation provider, the position is slightly different.
Because the employer has directly paid the travel or accommodation provider for an employee attending a permanent workplace, then the employee has been provided with a benefit in kind (BIK). The employee pays 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 suffered by the employee. This additional payment should be subject to tax and Class 1 NICs and reported on the Full Payment Submission (FPS) on a Real Time Information Return (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 the method described above for reimbursed expenses. This additional payment must also be accounted for as earnings via payroll and subject to tax and Class 1 NICs.
Note: Unlike grossed up reimbursed expenses, Class 1A NICs on the original amount/cash equivalent of the BIK should be declared on a P11D(b) return. However, please note the position is different for train tickets which are treated as travel vouchers, and are therefore subject to Class 1 NICs through the payroll.
We have set out two examples below which show how grossed up payments should be calculated for a) hotel accommodation and b) train tickets where the amount is not deductible, and the employer has elected to payroll the benefits.
Employee 1
Employee 1 who is only liable at England and Northern Irish basic rate tax has been directly provided with hotel accommodation totalling £567 paid by the employer to the hotel. Employee 1’s employer must declare this amount via the payrolling of benefits process.
The employer wants to make sure employee 1 doesn’t have any costs to bear in connection with the hotel accommodation provided, including any tax liability. To do this, the employer will make a one off, grossed up payment to employee 1, as calculated below:
Taxable Amount of the benefit of hotel accommodation = £567
Tax due on the benefit = £ 113.40
To Calculate the ‘grossed up’ amount:
1) £113.40 x 100 = £11340
2) 20% (basic rate of tax) + 8% (rate of primary Class 1 NICs) = 28
3) 100 – 28 = 72
4) £11340/72 = £157.50
so, the grossed up amount which will be added to their wages is £157.50
This will then be subject to deductions of tax at 20% £31.50 and primary Class 1 NICs at 8% £12.60, so the amount the employee is left with is £113.40. This is the amount of tax payable by the employee on the BIK provided, thus leaving them in a tax and NICs neutral position.
Separately the employer pays secondary Class 1 NICs at 13.8% on £157.50 which is £21.73
As the benefit of £567 has been payrolled, it should be reported on the RTI Return as additional income for tax purposes, and reported as a benefit taxed via the payroll, but the Class 1A NICs (13.8%) due from the employer (£78.24) is reported on the P11D(b) return.
Note: 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.
Employee 2
Employee 2 made all the same journeys as employee 1 (and works for the same employer). In this case the employee has been provided with train tickets also totalling £567.
However, employee 2 is liable at the England and Northern Irish higher rate of tax (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 NICs at 2% due = £11.34
Total deductions = £238.14
Additionally, secondary Class 1 NICs will be due at 13.8% = £78.24.
Calculate the ‘grossed up’ amount:
1) £238.14 x 100 = £23,814
2) 40 (higher rate of tax) + 2 (rate of Class 1 Primary NICs) = 42
3) 100 – 42 = 58
4) £23,814/58 = £410.58
The amount to be paid to the employee, which will be paid via payroll is £410.58.
The payment will be subject to tax (at 40% which is £164.23) and NICs (primary Class 1 NICs at 2% which is £8.21 and secondary Class 1 NICs at 13.8% which is £56.66).
Following this payment through, £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 NICs due by the employee on the BIK provided, thus leaving them in a tax and NICs 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 NICs purposes. It should also be reported as a benefit taxed via the 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 NICs purposes only. The employer can then decide whether to make an additional payment of earnings through payroll calculated as above, to cover the employee’s tax bill and the primary Class 1 NICs previously deducted.
Important considerations when making grossed up payments
There are two important points which need to be considered before an employer makes payments to employees to account for chargeable expenses/BIK. These considerations are:
- The additional payment to cover the tax and NICs on the benefit will count as earnings and as such 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 NICs 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 – After the end of each tax year, HMRC reviews the records of employees who are not required 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 the repayment to be made to someone else.
- NICs – The repayment of primary Class 1 NICs is not an automatic process and is subject to a refund claim. Whilst 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 NICs from the employee, HMRC will have no way of knowing this when a refund claim is processed and will refund primary Class 1 NICs to the employee instead.
Notes:
1) The examples above use the basic and higher tax rates applicable in England and Northern Ireland in the tax year 2024 to 2025. 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.
2) In the 2023 to 2024 tax year the primary Class 1 NICs rate changed from 12% to 10% on 6 January 2024. Use the rate of 12% when calculating a grossed up payment paid prior to 6 January 2024.
3) From 6 April 2024 the primary Class 1 NICs rate changed from 10% to 8%.