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HMRC internal manual

Employment Income Manual

From
HM Revenue & Customs
Updated
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Employment income: flexible benefit plans: earnings from employment

The first point to consider when dealing with a flexible benefit plan is: do the arrangements amount to a reduction in the amount of the cash pay that the employee is contractually entitled to receive (see EIM01141)?

If the answer to that question is yes, the next step is to check if the benefits that the employee gets are taxable as earnings within Section 62 ITEPA 2003 (see EIM00515) or only as benefits in kind under the benefits code. The distinction is important because:

  • there may be differences in the calculation of the chargeable amount and
  • more importantly, some statutory exemptions which apply to benefits within Section 203 (for example, the workplace nursery exemption in Section 318 (see EIM21900)) do not affect the tax charge on earnings within Section 62.

So what benefits are taxable as earnings within Section 62? The main ones are:

  • cases where the pecuniary liability principle applies (see EIM00580). That is, where the employer pays a bill for goods or services which is the legal responsibility of the employee. Note that pecuniary liability payments are subject to Class 1 NIC, but are P11D items for tax.
  • cases where the employee can give up the benefit in return for a higher cash wage whenever they wish to do so. This is the “Heaton v Bell” principle (see EIM00570). Note that this principle does not apply if the employees can only change their benefit choice once a year, or on the happening of a special event such as a promotion, marriage, the birth of a child, and so on.