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HMRC internal manual

Employment Income Manual

Deductions: directors’ and officers’ liabilities: amounts on which relief due

Section 346 ITEPA 2003

Section 346 gives directors and employees deductions against the earnings of an office or employment for:

  • amounts paid in respect of their liabilities related to the employment
  • costs or expenses incurred in connection with a claim that they are subject to such a liability and
  • so much of any premium paid under a qualifying contract of insurance as relates to indemnifying them against any such liabilities, costs or expenses.

See EIM30523 for the exclusion of matters that it would be unlawful to insure against.

From 6 April 2017, Section 346 is amended to include further deductions.

For tax year 2017/18 onwards, a deduction is also available against the earnings of an office or employment where an employee incurs costs or expenses in connection with giving evidence in or for the purposes of proceedings (or some other process or an investigation) about a matter related to their employment. The relief applies even if no other action is likely to be taken against the employee as a result of the proceedings.

In this instance “giving evidence” includes answering questions and making a statement either formally or informally.

In this instance “proceeding or other process” includes civil, criminal, disciplinary or arbitration proceedings and any process for resolving disputes or adjudicating complaints, and the exemption includes costs or expenses relating to any proceedings or investigations likely to take place.

Example 

If an employee gives evidence before a public inquiry about matters relating to their employment, even though an allegation has not been made against them, they are entitled to a deduction against their earnings for any expenses incurred for obtaining legal support.