Commuting Allowance

Is a commuting allowance a benefit in kind or just a taxable payment?

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Employer pays every employee £3k to help with the cost of travel to office.

The payment is made as a lump sum at the start of the year.  The payslip shows 1/12th of the payment as taxable (and corresponding deduction) which suggests the "benefit" is being treated as a payrolled benefit rather than P11D.

Question

Is a commuting allowance really a benefit?  My view is no as its a cash payment to the employee and they can spend it however they wish.  This means it should be going through payroll(RTI) when it is paid.  Only downside with this is you get a one off tax spike with this payment rather than it being spread over the year.

Am I missing something obvious?  My only thought is that if an employee claimed commuting as an expense and the employer repaid it would likely hit the P11D rather than payroll. This analysis may also be wrong, but it's what i've seen in practice.

 

Replies (20)

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By Bobbo
23rd Nov 2022 16:27

Sounds like clearly earnings.

Are you saying the £3,000 is paid to each employee outside of the payroll and then £250pm is taxed (and NIC hopefully) each payroll month.

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Replying to Bobbo:
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By ms998
23rd Nov 2022 17:12

Bobbo wrote:

Sounds like clearly earnings.

Are you saying the £3,000 is paid to each employee outside of the payroll and then £250pm is taxed (and NIC hopefully) each payroll month.

Yes. My view is it should be taken through RTI when paid (currently a BACS payment). I think it gets the right answer over a year, but HMRC would argue RTI isn't being applied properly.

If the employee leaves before year end, employer has right to recover money which I would assume would be negative amount in the final payroll (subject to employment law considerations) which means they get the right gross/tax answer for the year too.

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Replying to ms998:
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By Paul Crowley
23rd Nov 2022 18:05

The £3,000 sounds like contribution to a train ticket
If I was employer I would just add to Salary and forget it
The employment tribunal when trying to claim back would cost more, even if I won

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By Paul Crowley
23rd Nov 2022 16:27

All that matters is that it is taxed and NId
I agree, it is just extra remuneration
If not NId then it is the employers problem upon discovery, not the employee's

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By Hugo Fair
23rd Nov 2022 21:22

The payment is 'cash' and so not a BiK (that's a simplification, but true).

And yes the payment should be processed through PAYE + therefore reported via RTI (AND at the time of the payment - not reported on a pro-rated monthly basis).

Finally ... Tax and NICs are not the only aspects that are affected by this incorrect treatment (for instance any employees that are only just above NMW or are in receipt of UC will get incorrect calcs of their rights - and SL deduction in Month 1 may be wrong and etc etc ...).
Oh and the NICs may well be wrong depending on individual EE earnings levels (only Directors get the calc annualised).

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Replying to Hugo Fair:
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By Tax Dragon
23rd Nov 2022 22:03

Agree. I don't see how the tax and NI [and indeed the other aspects you mention] could end up being (reliably) correct if the whole thing is processed incorrectly.

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By possep
24th Nov 2022 07:42

sounds like an interest free loan:

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim26142

Being repaid over 12 months and monitored via payslips.

Under 10k so no BIK, tax or NIC issues per HMRC.

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Replying to possep:
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By ms998
24th Nov 2022 09:18

It's not a loan as it's not repayable unless the employee leaves the business before year end.

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Replying to possep:
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By Paul Crowley
24th Nov 2022 12:43

That is consistent with the treatment, so is probably reality.
Provided all parties understand that it is a loan.

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By Tax Dragon
24th Nov 2022 08:06

We could keep guessing.

Or OP could ask client.

When did asking Aweb replace asking clients as being the first thing to do?

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Replying to Tax Dragon:
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By ms998
24th Nov 2022 09:20

I'm looking in as someone with some knowledge of income tax/employment tax and I think it looks wrong for the reasons I stated. It was more of a confirmation check.

What exact question would you be asking the client in this situation assuming the outsourced payroll provider is not giving advice.

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Replying to ms998:
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By Hugo Fair
24th Nov 2022 10:26

Well ... "Could it, in any way, be construed as employer subsidising a *specific* item (like a season-ticket) - as opposed to it being entirely up to the employee to decide on what the money is spent?"

It would be hard to justify that claim but it might then be a BiK (if a loan); whereas as it stands (and as I said earlier) it is additional pay and needs to be processed through PAYE.

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Replying to Hugo Fair:
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By Bobbo
24th Nov 2022 14:15

If OP's client has their paperwork in order, is there an argument that there are two elements here:

- travel loan of £3,000 repaid by payslip deduction at £250pm and repayable in full if employee leaves before end of year; and
- travel allowance paid monthly at £250pm subject to tax and NI as earnings.

The loan repayment being equivalent to the travel allowance a complete coincidence...

Which would make the way it's currently being done okay perhaps?

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Replying to Bobbo:
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By Hugo Fair
24th Nov 2022 16:52

Not really sure what you've achieved there (apart from doubling up the admin effort)?

Basic problem is where you say "If OP's client has their paperwork in order" ... if they don't I couldn't recommend creating the paperwork retrospectively, and if they do then why haven't their processes followed those facts?

But as I said I can't see what this is meant to achieve?
* Why a travel loan AND a travel allowance?
* If it's a loan then it has to follow the rules as set out at https://www.gov.uk/expenses-and-benefits-loans-provided-to-employees (which is likely to mean treatment as a BiK) - but if it's an allowance then it has to follow https://www.gov.uk/expenses-and-benefits-public-transport/what-to-report... (which as we established a while ago means PAYE earnings).

BTW there's no indication by OP that £250/month is currently being deducted (just that it is treated as taxable/nicable earnings each month but, presumably, without actually being included in pay to the employee).

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Replying to ms998:
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By Tax Dragon
24th Nov 2022 14:29

ms998 wrote:

What exact question would you be asking the client in this situation.

Those 3 grands you pay your employees in April.... what are they? Do you provide any paperwork to your employees about it? Could I have a copy?

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Replying to Tax Dragon:
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By Paul Crowley
24th Nov 2022 14:44

The second question then depends upon the first answer, just like a flow chart.

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Replying to Paul Crowley:
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By Tax Dragon
24th Nov 2022 14:51

Or conversation.

I am envisaging the OP speaking with the client. That may be where I'm going wrong.

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By Hugo Fair
24th Nov 2022 17:07

Since I don't think anyone has addressed these two points/questions ...

1. "Only downside with this is you get a one off tax spike with this payment rather than it being spread over the year"
... to which the only (obvious) response is that it is what it is. If you want it (tax etc) 'spread over the year' then you need to spread the payments over the year.

2. "My only thought is that if an employee claimed commuting as an expense and the employer repaid it would likely hit the P11D rather than payroll".
Earnings and BiKs are both part of PAYE, which is why you can 'payroll' the latter during the year (despite the mangling of the English language when you do so) ... so your issue remains one of timing (of the payment).

There *are* different options (such as employer purchasing a season-ticket and providing it to employee), but reimbursement via 'cash' of an expense (that is not a business expense) is still basically earnings (and taxable/nicable).

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Replying to Hugo Fair:
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By Tax Dragon
24th Nov 2022 19:56

1 - I don't see a tax spike linked to a pay spike (if that's what it is... OP could really do with checking this with the client, obvs) as problematic. That the employee NIC might be out over the year if the wrong 'guess' about what's happening is made is... well, it's one more reason to check with the client... although doing that was already obviously the right thing to do.

2 - paying cash to employees for non-business expenses like commuting is payroll, not P11d. As you well know. (So does OP... it's where this thread started! So... Q2 here is a mystery.)

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Replying to Tax Dragon:
By SteveHa
25th Nov 2022 10:25

There is a possible tax spike if it is treated as remuneration subject to PAYE, in that this balloon payment at the start of the year suggests a much higher annual salary than will be the reality to HMRC (which a payment of £3K will, suggesting annual salary of £36K more than it will be), then real time coding may kick in and so could result in inflated tax deductions in months two and three until HMRC's alogorithms kick in again to correct.

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