You pay a clothing allowance to your customer-facing staff and your business pays their PAYE tax and NI. You’re considering providing the clothing direct as you recently read that it’s more tax efficient than paying an allowance. Is this correct?
Cash allowance v reimbursed expense
Generally, if you pay one of your employees a cash allowance separately or with their salaries it’s liable to PAYE tax and NI, even if the employee uses the allowance to buy something for which they can claim a tax deduction. Conversely, if you reimburse an employee for the cost of specific goods or services, you can make the payment tax and NI free if the items purchased would qualify for a tax deduction.
Example. Acom Ltd pays ten of its employees an allowance, added to their salaries, of £40 per month net of taxes to cover buying and laundering the uniforms they are required to wear at work. All of the employees pay basic rate tax on their salary and allowance. The cost of the allowance to Acom, including the tax and NI, is £650 each month (£7,800 per year). Alternatively, Acom could reimburse each employee for the money they spend on buying and laundering their uniforms, or Acom could buy the uniforms direct and have them laundered. If for the sake of comparison, this also cost Acom on average £40 per month per employee, the net cost would be £4,800 per year – a saving of £3,000 compared with paying the round sum allowance.
Tip. To avoid PAYE and NI costs, where possible don’t pay employees round sum allowances to cover their job-related expenses.
Workplace clothing
Paying for or reimbursing employees’ job expenses will only save PAYE tax and NI if the expense would be tax deductible if the employees incurred the cost themselves. This rule applies to workplace clothing only if under the terms of employment you require your employees to wear a uniform or protective clothing.
What counts as a uniform?
A uniform for tax purposes is more than just a style of clothing, e.g. dark trousers/skirt and a white shirt/blouse as these are normal apparel outside of the workplace. A uniform must make the wearer readily recognisable as an employee of your business and not be clothing someone would usually wear outside of work. Tip. Ordinary clothing can count as a uniform if you require it to carry a permanently fixed easily recognisable (to the public) badge, logo, etc.
What counts as protective clothing?
Protective clothing is something that needs to be worn because of the nature of the work. Common examples are mechanics’ overalls, protective gloves and boots used in the building industry, and medical PPE.
Example. The employees in a chemical factory are required to wear protective overalls and boots. Underneath their overalls they wear trousers and shirts but must leave this clothing at work because of the risk of contamination. After each shift they shower and then change into clean clothes to go home. The cost of the protective overalls and boots is tax deductible. No deduction is due for the cost of the clothing worn with the protective clothing (see The next step ).
A general allowance to cover job expenses is liable to tax and NI. If you pay these for your employees it costs more than if you provided the clothing or reimbursed only the amount employees spend. For example, an allowance of £4,800 per year would cost you an extra £3,000 in tax and NI.
The next step
HMRC’s guidance on protective clothing
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.