Severn Accounting
Tax & Accounting

Tax implications where employers pay above hmrcs approved

By Ali Jaw ·

When employers decide to cover tax bills on behalf of their employees—paying above what HMRC has formally approved—it can feel generous. In reality, it creates a complicated web of tax implications that both employers and employees need to understand. At Severn Accounting, we’ve seen how this well-intentioned approach can lead to unexpected liabilities and compliance headaches. Let’s walk through what actually happens when you go beyond HMRC’s strict guidelines.

Understanding HMRC’s Approved Schemes

HMRC has sanctioned specific circumstances where employers can cover certain tax costs without triggering additional tax charges. The most common example is meeting the cost of professional fees—such as accountancy, surveying, or legal costs—where the employee genuinely incurs the expense in performing their role. Similarly, certain relocation expenses fall within approved parameters when an employee is transferred to a new location.

The critical word here is approved. HMRC publishes detailed guidance on what qualifies, and staying within these boundaries is essential. When you venture beyond them—say, by covering personal tax bills, voluntary pension contributions, or National Insurance—you’re entering uncharted territory with serious consequences.

What Happens When You Pay Above the Threshold

When an employer covers an expense that HMRC hasn’t explicitly approved, that payment typically constitutes a taxable benefit in kind. This means the amount paid becomes subject to income tax and potentially National Insurance contributions for the employee.

Here’s the practical reality: if you pay £5,000 towards an employee’s personal tax bill and it’s not covered under an approved scheme, that £5,000 is treated as additional earnings. At the 2024/25 tax year rates, the employee faces income tax at their marginal rate (20%, 40%, or 45%) plus potential National Insurance at 8% (Employee NI). For an employee in the basic rate band, this equates to a 28% additional cost to the employer, compounded by secondary National Insurance on the employer’s side at 15%.

Worse still, the employee receives no additional salary to offset the benefit—they’re simply handed a tax bill for something they didn’t expect to pay for themselves.

The Compliance and Documentation Problem

From a compliance perspective, paying above HMRC’s approved threshold requires careful documentation. You must:

  • Report the benefit through the payroll and on the employee’s P11D form
  • Calculate the taxable value correctly (not always straightforward)
  • Ensure the employee’s tax code is adjusted, or they account for it via Self Assessment
  • Maintain clear records evidencing why the payment was made

Many employers make the mistake of treating these payments informally—a quick bank transfer without proper payroll processing. HMRC’s payroll compliance checks now frequently examine whether benefits have been correctly declared and taxed. If they find undeclared benefits in kind, you face not only back tax but also penalties and interest. For 2024/25, penalties for non-compliance can reach 100% of the unpaid tax.

The Employee’s Self Assessment Perspective

If the benefit isn’t properly declared through payroll, the employee may need to declare it on their Self Assessment tax return. This creates additional administrative burden and carries its own risks. Should the tax ultimately be owed but not reported, both employer and employee face potential enquiries. The employee’s tax return could be opened for review, and they could face substantial interest charges on late payment (currently 8% per annum plus Bank of England base rate).

What You Should Do Instead

The safest approach is to either: (1) stick rigidly to HMRC’s approved schemes, or (2) seek formal clearance from HMRC before implementing an unapproved benefit arrangement. You can apply for an HMRC ruling in advance through the relevant tax enquiry team—this gives you legitimate protection if HMRC later questions the arrangement.

Alternatively, build the cost into gross salary or offer the employee cash to handle the expense themselves. Whilst this increases your payroll costs, it’s transparent, compliant, and avoids nasty surprises.

Conclusion

Paying employees’ tax bills above HMRC’s approved thresholds is a false economy. What seems like employer generosity becomes a tax trap: additional costs for you through secondary NI, unexpected tax liabilities for employees, and significant compliance risks for everyone involved. The temptation to go beyond the rules often stems from good intentions, but HMRC’s framework exists precisely to prevent these complications.

If you’re considering an unapproved benefit or wondering whether your current arrangements are compliant, it’s worth taking professional advice now rather than facing an enquiry later. For tailored advice, contact Severn Accounting — we’re here to help.