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HMRC internal manual

Employment Income Manual

Employment income: flexible benefit plans:


Many flexible benefit plans involve the employee being allocated a “benefit allowance” (described in some schemes as a “flex fund” or “flex account”). This “allowance” represents the amount of money that the employer is prepared to spend to provide the employee with their chosen benefits. You will usually be able to accept that the “benefit allowance” itself is not an amount on which the employer must operate PAYE/NIC, except to the extent that the employee chooses to draw it in cash. In most cases, the amount of cash that the employee is entitled to receive is not fixed until the employee has made his or her choice ofbenefits.

For example, an employee may be allocated a “benefit allowance” of £2,000 per annum, of which they “spend” £1,700 on various benefits in kind and take £300 per annum in cash. The £300 is subject to PAYE and Class 1 NIC, but the £1,700 is not.The benefits in kind that the employee gets are taxed in the normal way (and subject to Class 1A NIC from 6 April 2000).

Sometimes, the employer’s scheme allows the employee to “spend” more than their benefit allowance. For example, the employee in the previous paragraph might want benefits to the value of £2 250, the extra £250 (over and above the £2 000 benefit allowance) being met by an adjustment to their basic salary. In that case, it is again necessary to decide whether or not there has been an effective reduction in the employee’s contractual cash pay (see EIM01141).