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Working for an employer Tax-free pay

Working for an employer

Some work expenses aren't tax deductible

Though you pay income tax on most of your earnings (including overtime, bonuses, commission, tips and holiday pay), some payments from your employer are tax-free. 

These do not count towards your taxable income, and do not have to be declared if you are sent a tax return. 

Tax-free payments

They include:

  • Reimbursed expenses for which your employer has a formal agreement (a ‘dispensation’) with HMRC.
  • Reimbursed expenses where your employer makes a voluntary agreement with HMRC to pay tax on your behalf.
  • Mileage allowance up to HMRC-approved rates (40p per mile for the first 10,000 business miles and 25p per mile thereafter) if you use your own car for work.
  • Payments of up to £3 per week for extra household costs if you regularly work at home by arrangement with your employer. Your employer may pay more if you can supply evidence that it is justified.
  • Various allowances paid to members of HM forces, for example: operational allowance for members serving in combat zones, such as Afghanistan; mess allowance and travel to and from leave expenses; and council tax relief payments.

National Insurance

Reimbursed expenses that are free of income tax are not automatically free of National Insurance. 

The general rule is that if the reimbursement is a distinct payment specifically aimed at reimbursing, or making a contribution towards, expenses that you have actually incurred, then the payment should be National-Insurance-free. 

However, some expenses are always National-Insurance-free. This includes mileage allowance up to HMRC-approved rates if you use your own car for work, and operational and mess allowances and council tax relief payments for members of the Armed Forces.

Allowances

In addition, of course, earnings covered by your personal allowance are tax-free. Bear in mind, if you are a mature employee (aged 65 or over), you qualify for a higher personal allowance, so more of your earnings should be tax-free.