NIM05600 - Class 1 NICs: Expenses and allowances: Recording expenses payments

Recording expenses payments for tax purposes

Generally, employers pay expenses and allowances such as telephone bills, car allowances and subsistence payments outside of the normal payroll arrangements. If so, at the end of the tax year they must send the officer of HM Revenue and Customs (HMRC Officer) details of employees’ expenses and of any benefits provided during the year, whether they are of a cash or non-cash nature. This is not required, however, if HMRC has granted a dispensation (see NIM05500) or if the employer operates the Fixed Profit Car Scheme (FPCS) in relation to motoring expenses he provides (see SE30205).

The HMRC Officer works out the tax liability, if any, for each employee and, where necessary, may adjust the individual’s tax coding. Because this is an annual return, it does not matter to the HMRC Officer when during the year the employer paid the expenses.

In other instances the employer may pay such expense payments through the normal payroll and deduct Pay As You Earn (PAYE) tax and NICs as usual.

Top of page

Recording expense payments for NICs purposes

There is an important distinction between recording expenses and other payments for tax and NICs purposes.

As explained above, for tax purposes HMRC requires an annual return of such payments. However, for NICs purposes any liability for NICs which may arise does so at the time the employer pays the expenses. See NIM01002.

Employer pays expenses through normal payroll system

If an employer pays expenses through the normal payroll system there is no problem. If NICs are payable the employer will calculate them as normal.

Employer pays expenses outside the payroll system

If an employer pays expenses outside the payroll system they must:

  • add the expenses to any other payments, for example wages or salary, made in the same earnings period, and
  • calculate NICs on the total.

Employers should try to ensure that they have a reporting system which allows the payroll section to receive the relevant information before the end of the earnings period so that they can record the total earnings figure on the Deductions Working Sheet (DWS).

We recognise that it may not always be possible for an employer to establish a system which allows them to get information about expenses to payroll sections in time. This may mean that for some employers it will be impossible to comply with what is set out in the preceding paragraph.

In that event NICs should be calculated on the expenses when they are put through the payroll and you should not insist that the employer recalculates every pay period.

Employer Compliance Officers who discover such practices should explain the correct requirements and only accept that this cannot be done if the employer can demonstrate that the system they operate cannot accommodate the required change.