As a general rule, the cost of travelling between home and a permanent workplace is regarded as a personal expense. If an employer chooses to meet this expense, the payment would be chargeable to tax and National Insurance Contributions (NIC). However, journeys from home to a temporary workplace can be regarded as a business expense, allowing employers to reimburse the employee the cost without accounting for tax or NIC.
To qualify for tax relief, the placement must not:
- last or expect to last more than 24 months;
- represent all or almost all the time that the employee holds that employment.
Travel expenses include not only the journey costs, but also associated accommodation and food costs. It is not uncommon for construction industry employees to work at a location for less than 24 months and then move to another temporary location, which could result in these journeys being eligible for relief. This would allow the employer to make payments to the employee to cover the travel and subsistence costs without accounting for tax and NIC. Many employers are already paying for the cost of the journey as tax-exempt expenses but not subsistence costs.
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If construction industry workers are on temporary placements, it can be beneficial to both employer and employee for them to enter into a salary sacrifice arrangement. Some of the salary which would have had tax and NIC deducted, is given up in favour of subsistence expenses which can be paid free of tax and NIC.
Under this arrangement, a basic rate tax payer can make savings of 31p for every £1.00 sacrificed, leaving the employer with NIC savings of 12.8p. In addition, any employees entitled to tax credits could find an increase in their credits, as business expenses payments do not count as earnings for tax credit purposes.
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To simplify the process, businesses can reach an agreement with HMRC to pay round sum subsistence allowances, without the requirement for submitting receipts. They can agree rates specific to the business by submitting receipts for a sample of employees or the sampling process can be avoided by agreeing the use of benchmark rates where certain conditions apply. The benchmark rates for example allow £5 for an employee working away for over 5 hours and £10 when working away for over 10 hours.
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In today’s economic climate, employers are looking for ways to reduce their payroll costs while offering employees an incentivising remuneration package. Where employees work on a series of placements each lasting and intending to last less than 24 months, this can be achieved by introducing a salary sacrifice scheme in favour of travel and subsistence payments.
A salary sacrifice scheme in favour of tax exempt travel and subsistence expenses is ideal for use in the construction industry, increasing the employees’ net pay while reducing the employer’s National Insurance bill.