Part 2 of this examination of tax and NI free benefits. Providing benefits that are exempt from income tax is a great way to reward employees in a tax-efficient way. Which benefits qualify for tax-free treatment?


Home-to-work travel

Can employers provide free bus travel for employees to get to and from work?

Yes, there are two ways to do this:

  • set up a works transport service; or
  • if this is not an option, contribute to a local bus service which provides free travel to employees.

Provided certain conditions are met, both options enable the employer to meet the cost of employees’ travel to work without triggering a taxable benefit.


What’s a works transport service?

This is a service that is provided by means of a bus or minibus for conveying employees on a qualifying journey. A qualifying journey is one between the employee’s home and workplace or between two workplaces.

Provided the following conditions are met, the benefit can be provided tax free:

  • the service is available generally to employees of the employer, or each employer, concerned
  • the main use of the service is for qualifying journeys by those employees; and
  • the service is used only by the employees for whom it is provided or is substantially used only by those employees or children (aged under 18).


What sort of vehicle qualifies?

The exemption only applies if the service is provided by means of a bus or a minibus. For these purposes, a bus is defined as a road passenger vehicle that has a seating capacity of twelve or more passengers, and a minibus is defined as a vehicle constructed or adapted for the carriage of passengers that has a seating capacity of nine, ten or eleven.

The exemption does not apply if the transport is provided by means of a people carrier or similar modified vehicle to carry nine passengers or more. It must be a bus or a minibus.


Can the bus be used for other purposes?

The exemption applies to the use of the bus for qualifying journeys rather than to the vehicle itself. Consequently, if an employer uses the bus, say, to take staff on a night out this will not be covered by the exemption.

However, a separate exemption allows the bus to be used for certain short journeys without a problem. Allowable journeys are those of not more than ten miles between the workplace and shops or other amenities which are made on a working day. This would allow the bus to be used, for example, to take people into town at lunchtime without a problem.

If an employer can justify the expense of providing transport, e.g. a minibus, to ferry employees to and from work, they could consider clubbing together with nearby businesses to share the arrangement and the cost. The exemption will still apply.


What about subsidising a local bus service to provide transport for employees?

If it’s not viable for the employer to operate their own works bus service, they can still provide tax-free home-to-work travel for employees. This involves making a payment or some other support to a local bus company in exchange for it providing cheap or free home-to-work travel to employees. HMRC refers to this arrangement as “subsidising” a local bus company in exchange for travel services.

Where an employer is to subsidise a local bus service, both conditions A and B below must be met for the tax and NI exemption to apply to the cheap or free bus travel. In any other case, the exemption is conditional on A to C being met.


What are the conditions?

The conditions are as follows:

Condition A

The service is used by employees of one or more employers for qualifying journeys. A qualifying journey is one between the employee’s home and workplace or between two workplaces.

Condition B

The service is generally available to employees of the employer, or each employer, concerned.

Condition C

The terms on which the service is available to the employees of the employer, or each employer, concerned are not more favourable than those available to the other passengers.

Where the travel is provided by means of a supported local bus service, Condition C does not apply. This means that the employees are able to travel on terms that are more favourable than those available to other passengers without losing the benefit of the exemption.

Can employees use an employer-provided voucher to use the service?

As long as the underlying benefit is exempt, it can be obtained by means of a voucher, e.g. a season ticket, without triggering a tax liability.


Employer-provided equipment and Homeworkers

Can an employer provide employees with equipment without triggering a taxable benefit ?

It’s usual to have a business premises where employees will work, such as an office or a factory. The employer will also usually provide equipment that they need to perform the duties of their job. But sometimes they may work at home or a location of their own choice. Whichever of these applies, if the employee derives some personal benefit from use of the equipment etc., this will be exempt from tax and NI as long as conditions A and B apply.

Condition A

Any use of the accommodation, supplies or services for private purposes by the employee or members of the employee’s family or household is not significant.

Condition B

Where the equipment is provided at a location other than the business premises, e.g. the employee’s home, its sole purpose is to enable them to perform the duties of the employment.

The exemption from tax and NI doesn’t apply to the use of:

  • a motor vehicle, boat or aircraft; or
  • a benefit that involves the extension, conversion or alteration of living accommodation or the construction, extension, conversion or alteration of a building or other structure on land adjacent to or enjoyed with such accommodation.

HMRC applies the exemption with some flexibility so that insignificant or incidental private use of the equipment provided for employees, for example the occasional use of an employer-provided photocopier to copy private documents, won’t result in a tax or NI charge. This lenient approach extends to personal use of a work computer which is intended solely for work but is occasionally used for private purposes.


Is there a tax charge if the employer pays an employee’s energy etc. costs?

Employers can pay staff a tax and NI-free allowance to cover the additional costs of working from home. This can be paid to cover any reasonable additional household expenses, which the employee incurs in carrying out duties of the employment at home under “homeworking arrangements”.

For the purposes of the exemption, “homeworking arrangements” are those between the employee and the employer under which the employee regularly performs some or all of the duties of the employment at home. Household expenses are any expenses connected with the day-to-day running of the employee’s home, e.g. light and heat.

While there’s no limit to the amount employers can pay, HMRC provides a guideline maximum exempt amount of £6 per week. HMRC doesn’t require employers or their employees to keep records to justify the additional expenditure they incur unless they pay amounts in excess of its guideline amount. Amounts paid in excess of the employee’s additional costs, or if applicable the guideline amount, count as taxable earnings for PAYE tax and NI purposes.


Incidental overnight expenses

What are incidental expenses?

Where an employee is required to work away from home and stay overnight, they are likely to incur costs for food and accommodation. As these are job related they can be reimbursed or paid for direct to the provider, e.g. hotel, tax and NI free. However, the employee will often incur personal incidental expenses on such things as phone calls home and newspapers. Usually, payment of any personal costs for an employee would be taxable as salary or wages, but sometimes they can be paid for tax free.


Can payments be made tax free?

Incidental overnight expenses that meet certain conditions can be paid tax free as long as the overall monetary limit is not exceeded.

The exemption applies to sums that exclusively pay or reimburse expenses that are incidental to the employee’s absence from the place where they normally live, that relate to a continuous period of such absence in relation to which the overnight stay conditions are met (known as a qualifying period) and would not be deductible if the employee incurred and paid them.


What is the “overnight stay” condition?

In order to qualify for the exemption for incidental overnight expenses and benefits, the absence in respect of which they are paid must meet the overnight stay conditions.

These are as follows:

  • the employee is obliged to stay away from the place where they normally live throughout the period
  • the period includes at least one overnight stay away from that place; and
  • each such overnight stay during the period is at a place where the expenses meet conditions A or B below.

Condition A

The travel expenses related to the overnight stay qualify for a tax deduction; essentially this applies if the employee is working away from their home and normal place of work.


Condition B

The travel expenses fall within the exemption for work-related and individual learning account provisions or would if the employer paid or reimbursed them.


What is the exemption limit?

The exemption for incidental overnight expenses and benefits is limited to £5 per night for each night spent wholly in the UK and to £10 per night for each night during the period spent wholly or partly outside the UK.

The total of these amounts is known as the “permitted amount”. If this is exceeded for the period the employee stays away the whole payment, not just the excess, is taxable. The limit applies to the period that the employee is away, not on a night-by-night basis.


William is away on business. He is away for six nights. He spends the first night in the UK and the remaining five nights in France. His employer reimburses incidental overnight expenses for the trip as follows:


Amount reimbursed (in £)

1 - UK


2 - France


3 - France


4 - France


5 - France


6 - France





The permitted amount for the trip is £55 (one night at £5 plus five nights at £10). As the total reimbursed for the trip (£54) does not exceed the permitted amount, the whole amount is tax and NI free. It doesn’t matter that the individual daily limits are exceeded on nights one, five and six - what’s important is that the total of these is within the permitted limit.

A payment greater than the permitted amount is wholly taxable, i.e. the exemption does not apply to any of it. The employee can avoid the tax charge if they reimburse the excess before 6 July following the end of the tax year. The limit applies per trip so it doesn’t matter if it’s exceeded for a particular night as long as the amount remains within the limit for the trip as a whole.


Living accommodation

In what circumstances can employers provide tax and NI exempt living accommodation?

Employers can provide tax and NI-free living accommodation where it’s:

  • necessary for the proper performance of the employee’s duties
  • for the better performance of an employee’s duties, as long as the employment is of a kind where it is customary to provide accommodation for the employee
  • needed because there’s a special threat to the employee’s security, special security arrangements are in force and the employee lives in the employer-provided accommodation as part of those arrangements.

The first two exceptions do not apply to directors unless the director doesn’t have a material interest in the company; broadly that means ownership of 5% or more of a company’s share capital and works full time, or the company is either a non-profit making company or a charity.


What type of jobs can meet the “proper performance” test?

HMRC allows living accommodation to be provided to the following types of employees tax free on the grounds that job-related accommodation is necessary for the proper performance of their duties:

  • agricultural workers living on farms or agricultural estates
  • lock-gate and level crossing gatekeepers
  • caretakers with a genuine full-time caretaking job who live on the premises
  • stewards and greenkeepers who live on the premises; and
  • wardens of sheltered housing who live on the premises.


What’s the “better performance” test?

The employer would need to demonstrate that the employee could perform their duties better by living in the job-related accommodation than if they lived elsewhere. This may be the case for an employee on call outside working hours who lives in job-related accommodation to ensure they can get to the call-out quickly.


How is the “customary to provide” accommodation applied?

This is quite a tough test. HMRC will accept that the job is one where it’s customary to provide accommodation if more than 50% of workers in that type of job are provided with it.

If the job is of a type which is represented by a trade association, they may be able to advise of whether it’s “customary”.


What counts as necessary security purposes?

HMRC applies this rule stringently and will only accept this test as met if there is a genuine terrorist or other threat to a worker’s physical safety. Accommodation provided to enhance the employee’s wellbeing doesn’t count.


Where an employer provides accommodation, what is the position if they pay for related services?

If the provision of living accommodation is exempt, any reimbursement of payment to the employee in respect of council tax or sewerage charges relating to the accommodation can also be made tax free.

There is a limited exemption for other expenses, e.g. those for repairs, heating and lighting. The exemption is a maximum of 10% of the employee’s “net earnings” from the employment which provides the accommodation. Net earnings broadly mean earnings from the job less related expenses and pension contributions.

Where the provision of job-related accommodation is exempt from tax, the employer can also meet the costs of certain expenses tax free, such as council tax, heating and lighting.


Long service awards

What type of award can be made?

Long service awards to employees can be made tax free provided it takes a form permitted by the tax rules and does not exceed the permitted maximum.

For these purposes, a long service award is one that is made to mark not less than 20 years’ service with the same employer. The tax and NI free amount is limited to £50 for each year of service. Thus for 25 years’ service an award to the value of £1,250 could be made tax free.

An employer can make an award with a value more than the maximum and only the excess is taxable and subject to NI as a benefit in kind.


Are there any restrictions on the type of award that the employer can make tax free?

For the exemption to apply the award must not be cash, a cash voucher, e.g. premium bonds, a credit token e.g. a credit or debit card, or shares unless they are shares in the employing company. A non-cash voucher such a store gift voucher (including online stores) is OK and qualifies for the exemption. The exemption will also apply to tangible movable property. This means traditional long service awards, such as a gold watch or a carriage clock are therefore fine.

An employer can make a tax and NI-free award of a gift that the employee could choose to convert to cash if they wish, for example a case or two of collectable wine.


Medical check-ups and treatment

When is the cost of a medical check-up tax and NI exempt?

An employer can, at any time, provide employees with a health screening assessment or a medical check-up without triggering a tax or NI bill.


Are there any conditions to this exemption?

The exemption is limited to a maximum of one health screening and one medical check-up each tax year.


Is there an exemption for providing medical treatment?

Yes, where an employer pays for medical treatment for an employee while they are working abroad. For the tax and NI exemption to apply they must have agreed before the employee required treatment to meet the cost unless they arrange and pay the treatment provider (or the medical insurer) directly for the employee’s treatment.

Meeting the cost of medical treatment resulting from an injury or illness caused directly from the employee doing their job is also exempt from tax and NI.

Additionally, an employer can pay for an employee’s medical treatment without the expense being taxable or liable to NI if the injury or illness being treated resulted in the course of or as a direct consequence of them doing their job.


Are there special rules for employees who have been off work long term because of illness?

Yes, yan employer can pay up to £500 tax and NI free towards the cost of helping an employee to return to work after long-term illness. If they pay more than £500, the excess counts as taxable pay for the employee.

The employee must have either:

  • been assessed by a health care professional as unfit for work because of injury or ill health for at least 28 consecutive days
  • been absent from work because of injury or ill health for at least 28 consecutive days.

For the purposes of the exemption medical treatment means all procedures for diagnosing, or treating any physical or mental illness, infirmity or defect.

A further condition of the exemption is that the treatment must be arranged by the employer.



When are free or subsidised meals for employees exempt?

Free or subsidised meals to employees can be provided tax and NI free if conditions are met. The meals must be prepared in a canteen where they are provided for employees generally or to those at a particular location, or if they are served on the employer’s business premises and conditions A to C below are met.

Condition A

The meals are provided on a reasonable scale. Caviar may be off the menu but steak and chips with a glass of wine would be okay.

Condition B

That all employees or all of them at a particular location, e.g. a particular branch office, may obtain either a free or subsidised meal and/or a free or subsidised meal voucher or token.

Condition C

If the meals are provided in the restaurant or dining room of a hotel, or a catering or similar business, at a time when meals are being served to the public, part of the restaurant or dining room is designated for the use of employees only and the meals are taken in that part.

It’s not necessary that all employees actually obtain the free or subsidised meals, just that they have an opportunity to do so.

Directors and senior employees can enjoy different and superior quality food to other workers and the exemption still applies. So while the other employees enjoy coffee or tea with their meal, directors could have a glass or two of a reasonably priced wine.

Where the food is provided away from the business premises, the exemption will only apply where it’s provided in a designated area of a café or restaurant that’s not open to the public for at least the period it’s being used as the employees’ canteen.


Is food for employees where they attend a lunchtime meeting covered by the exemption?

It depends, meals that don’t meet the conditions for exemption, for example because they are not available to all employees, are a taxable benefit where they are provided to employees and directors. An exception to this applies for meals taken in the course of work-related training which requires employees to travel away from their normal workplace to attend. The location must be sufficiently distant from the workplace that the employee would be entitled to claim a tax deduction for the cost of subsistence as if they had been travelling to, say, a customer to carry out work at their premises.

PAYE auditors often look for evidence of sandwich lunches for selected groups of employees; the associated benefit is frequently overlooked and not declared on the P11D. 

Where sandwich lunches or similar are provided, employers could consider settling the associated liability by means of a PAYE settlement, an agreement to keep on the right side of HMRC without hitting employees with a tax charge.


What about tea and coffee. Surely that isn't taxable?

No, in this case HMRC accepts that the provision of free tea and coffee and also water coolers counts as a trivial benefit and so is exempt from tax and NI.


Mileage allowance payments and passenger payments

What are mileage allowance payments?

Mileage allowance payments (MAPs) are amounts that an employer pays an employee to compensate them for the cost of using their own vehicle, i.e. car, van, motorcycle or bicycle, for business travel.


What does the exemption cover?

The exemption only applies to approved mileage allowance payments (AMAPs). Mileage allowance payments are approved if the total amount of all such payments made to the employee for the kind of vehicle in question does not exceed the approved amount for such payments applicable to that kind of vehicle. Amounts paid in excess of the approved amount are taxable and must be declared on the P11D.


What is the approved amount?

The approved amount that will make a MAP into an AMAP is worked out by using the simple formula: M x R.


  • M is the number of miles of business travel by the employee (other than as a passenger) using that kind of vehicle in question; and
  • R is the rate applicable to that kind of vehicle.

Separate rates are set for cars and vans, motorcycles and bicycles. The rates applying since the introduction of the mileage allowance scheme from 6 April 2002 are as set out in the table below:


Type of vehicle

Exempt rate per mile - tax

Exempt rate per mile - NI

Car or van

45p per mile for first 10,000 miles

25p per mile thereafter

45p per mile








Different rates apply for cars and vans for the first 10,000 miles travelled in the tax year and subsequent miles once the first 10,000 mile threshold has been reached. The 10,000 mile limit applies to the total number of business miles travelled by the employee in relation to the employment.

Example 1

Jane uses her own car for business travel. During the tax year in question she travels 12,000 business miles. She is paid in accordance with the mileage allowance rates of 45p per mile for the first 10,000 business miles and 25p per mile thereafter.

The approved amount is M x R

(10,000 x 45p) + (2,000 x 25p) = £5,000

Jane can be paid mileage payments of £5,000 for the tax year tax free. Her employer does not need to return the sums paid on the P11D.

Example 2

Mark uses his own van for work. He is paid a mileage allowance of 50p for each business mile that he travels. During the tax year in question he travels 20,000 business miles. He is paid a mileage allowance of £10,000 (20,000 business miles @ 50p per mile).

The approved amount is M x R

(10,000 x 45p) + (10,000 x 25p) = £7,000.

Mark is paid £10,000. As this exceeds the approved amount, the excess of £3,000 (£10,000 - £7,000) is taxable and Mark’s employer must return it on the P11D at Section E.

Where mileage payments made to employees exceed the approved amount, the excess is taxable and must be reported on the employee’s P11D.

Payments made for private mileage - this includes payments in respect of travel between home and the normal place of work - are taxable as a benefit in kind and subject to NI as normal pay earnings.


Do the same rules apply for NI purposes?

No. The rules applying for NI purposes are slightly different to those for tax. As Class 1 NI contributions are calculated by reference to earnings periods, the qualifying amount is calculated separately for each earnings period. Mileage payments in excess of the exempt amount must be added to gross pay and are liable for Class 1 NI contributions.

For NI purposes, the exempt amount is the number of business journeys x approved mileage rate. The approved mileage rate is the same as for tax purposes with one exception. The exempt amount for cars and vans is 45p per mile, irrespective of the number of business miles travelled by the employee in the tax year.

Example 1

Toby is paid monthly. He uses a car for business travel. In one month he travels 2,000 business miles. He is paid a mileage rate of 30p per mile, a total for the month of £600.

The NI exempt amount is 2,000 x 45p = £900. As the amount paid to Toby is less than the exempt amount, no NI is due.

Example 2

Oliver uses his car for work. He has been paid mileage allowances for business travel of 10,000 miles in the year so far. He is paid for another 2,000 business miles by his employer at 35p per mile.

The exempt amount for tax on the further mileage payment is 25p per mile (because Oliver has already been paid an allowance for 10,000 miles), therefore the excess must be reported on a P11D by his employer and Oliver will be taxed on 10p per mile, i.e. £200 (35p – 25p) x 2,000. However, the 35p per mile is less than NI the exempt amount of 45p and so Oliver and his employer are not required to pay NI the on the mileage allowance.

For tax purposes the calculation can be made once at the end of each year with any excess being reported on the P11D rather than being added to gross pay for the month.


What happens if the amount paid is less than the approved amount?

Sums paid up to the approved amount are exempt from tax and NI. Further, employees can claim tax relief to the extent mileage payments fall short of the full exempt amount. For example, if an employer pays workers 40p per mile for business journeys, the employees can claim tax relief on 5p per mile.

The employee can make a claim in their tax return, via their personal tax account (if they are registered for one with HMRC), on Form P87 or by writing to HMRC. Form P87 can be completed online at


How can employers make best use of the exemption for MAPs?

If employees use their own car for work, paying mileage allowances equal to the exempt amount will maximise the use of the exemption. The employee receives the payments free of tax and NI and there will be no employers’ NI.

Paying passenger payments, which are also free of tax, can further enhance the benefit of the exemption.


What are passenger payments?

Passenger payments are amounts paid to an employee because, while using a car or van for business travel, their vehicle is carrying one or more passengers who are also employees for whom the travel is business related.

Employers can encourage employees to share cars with work colleagues on business trips. Paying one driver a MAP and a passenger allowance is much cheaper than paying two or more employees to travel in separate cars to the same place. It is obviously better for the environment too.


What does the passenger exemption cover?

The exemption only applies to passenger payments up to the approved maximum of 5p per mile per passenger. Passenger payments count as exempt if the total of these for a tax year as a whole doesn’t exceed the approved amount for such payments.

Unlike mileage allowance payments, employers can make passenger payments to employees who drive company car drivers as well as to employees using their own car.


What is the approved (exempt) amount for passenger payments?

The approved amount is found by applying the formula M × R, where:

  • M is the number of business miles in the tax year for which the employee carries one or more passengers who are also employees for whom the travel is business travel and in respect of which passenger payments are made; and
  • R is the rate of 5p per mile.

In the event that the employee carries two or more passengers in a tax year, the approved amount is calculated separately for each passenger.

Amounts paid in excess of the approved amount are taxable and must be reported on the P11D.


During the tax year in question, Paul carries two colleagues on business journeys. Andrew travels 2,500 business miles as a passenger in Paul’s car and Chloe travels 5,000 business miles as a passenger in Paul’s car.

Paul’s employer pays a passenger rate of 10p per mile.

Paul receives passenger payments of £250 (2,500 miles @ 10p) in respect of Andrew and £500 (5,000 miles @ 10p) in respect of Chloe.

The approved amount in respect of Andrew is £125 (2,500 miles @ 5p). The amount received by Paul is in excess of the approved amount. The excess of £125 is taxable and must be entered on Paul’s P11D by his employer.

The approved amount in respect of Chloe is £250 (5,000 miles @ 5p). The amount received by Paul exceeds the approved amount. The excess of £250 is taxable and must be entered on the P11D by Paul’s employer.

As Paul receives more than the approved amount, the excess is taxable and must be reported on the P11D.


What about NI and passenger payments?

No Class 1 NI contributions are payable on passenger payments made to employees who do not exceed the qualifying amount.

The qualifying amount is calculated in the same way as the approved amount for tax purposes. However, the calculation is performed separately for each earnings period rather than for the tax year as a whole.

Amounts in excess of the qualifying amount are liable for Class 1 NI. The excess over the qualifying amount is added to the earnings for the earnings period for the purposes of working out Class 1 NI due. This differs from the tax treatment in that any excess over the approved amount for tax purposes is returned on the P11D.