During employment an employee may incur expenses out of their own pocket. If these expenses qualify as allowable deductions they can be deducted from earnings to calculate the taxable income.
But how does an employee know which expenses are deductible? This article explores the rules and legislation that determine the deductibility of various expenses.
Deductible Expenses: Understanding the Rules
1. Expenses Deductible Under Section 336 ITEPA 2003
To claim a deduction under this rule, the following conditions must be met:
The expense must be incurred as an obligation of the employee’s role.
It must be wholly, exclusively, and necessarily incurred in performing job duties.
The "Necessarily" Requirement
HMRC places significant emphasis on the term "necessarily." They evaluate whether the employee could perform their job without incurring the expense. If the answer is "yes" the expense is generally disallowed.
Due to this strict interpretation obtaining relief under this section has proven challenging for employees. HMRC often succeeds in disputing claims resulting in many deductions being denied.
2. Travel Expenses (Sections 337 and 338 ITEPA 2003)
Travel expenses are deductible if they meet specific criteria:
Ordinary commuting (e.g., home to work) is not deductible.
Travel to a temporary workplace (e.g., from home or office) is allowable if:
The workplace is temporary (not exceeding 24 months).
The time spent there represents less than 40% of the employee’s total working time.
3. Payments to Occupational Pension Schemes
Contributions to employer-run pension schemes are deducted from gross salary before PAYE is applied, reducing taxable income.
However, for National Insurance Contributions (NIC), the gross amount remains chargeable. This means no NIC relief is available for such contributions.
4. Professional Fees and Subscriptions
Professional fees and subscriptions can be deductible if:
They are paid to an approved body listed by HMRC.
The activities of the body directly benefit the profession practiced as part of employment.
Example:
A company director's subscription to the Institute of Directors is deductible as it directly relates to their role and is paid to an approved body.
Conversely, a subscription to a local golf club would not be deductible, as it is unrelated to employment duties.
5. Charitable Donations via Payroll (GAYE Scheme)
Charitable donations made through a payroll deduction scheme, such as Give As You Earn (GAYE), are deducted from gross salary before PAYE is calculated. This provides immediate tax relief to employees. Employers then forward the donations to the respective charities.
6. Client Entertainment
Employees can claim a deduction for client entertainment expenses only if:
The employer disallows the amount in their tax calculations.
The expense is reimbursed by the employer or paid via a lump sum allowance.
7. Round Sum Allowances
Round sum allowances are exempt from tax if they reimburse qualifying business expenses. If an advance is paid before expenses are incurred the full amount is taxable as earnings. However, employees can later claim deductions for allowable expenses, excluding client entertainment.
Speak to an Expert
If you're a business seeking guidance on reimbursing staff expenses or an employee unsure about the deductibility of your work-related expenses, we're here to help. Contact us today for tailored advice on allowable deductions and tax relief opportunities.
Authored by: London Tax team
Commenti