Tax Credits: Employment income

HMRC publish some information on the GOV.UK website and produce a worksheet TC825 to help with calculating deductions. See also pages 11-16 of the TC 600 guidance notes but please note that whilst it is still useful, HMRC have withdrew this publication in April 2019 and it has not been updated since then).

‘Employment income’ broadly follows employment income for tax purposes, so most employees can use the amounts given on their P60 or P45. However, there are a number of minor differences between the two, particularly in the treatment of benefits in kind.

‘Employment income’ means:

Employment income does not include pension income.

Benefits in kind and similar payments

In calculating the value of a benefit to be included in employment income for tax credits, the higher of the following two figures is used: the monetary value of the benefit to the employee; or the cost to the employer of providing it (less any contribution by the employee).

Taxable benefits included in employment income are broadly the cash equivalent of company cars and fuel, taxable expenses payments and mileage allowances, cash and non-cash vouchers and credit tokens, and money's worth – broadly, anything that can readily be converted into cash.

Taxable benefits that are not counted are living accommodation, vans, beneficial loans, taxable sick pay, and scholarships.

Other payments and benefits that are disregarded for calculating income tax on income from employment are generally disregarded in assessing employment income for tax credits except, with effect from 6 April 2017, where the payment or benefit is provided pursuant to optional remuneration arrangements (for example under a salary sacrifice arrangement or paid in lieu of salary) and is neither a special case benefit nor an excluded benefit (ie the type of benefit that is not taxable).

Special case benefits are excluded from income tax by any of the following provisions in ITEPA :

(a) section 289A (exemption for paid or reimbursed expenses);
(b) section 289D (exemption for other benefits);
(c) section 308B (independent advice in respect of conversions and transfers of pension scheme benefits);
(d) section 312A (limited exemption for qualifying bonus payments);
(e) section 317 (subsidised meals);
(f) section 320C (recommended medical treatment); and
(g) section 323A (trivial benefits provided by employers).

Excluded Benefits are excluded from income tax by any of the following provisions in ITEPA:

(i) section 239 (payments and benefits connected with taxable cars and vans and exempt heavy goods vehicles);
(ii) section 244 (cycles and cyclist’s safety equipment);
(iii) section 266(2)(c) (non-cash voucher regarding entitlement to exemption under section 244);
(iv) section 270A (limited exemption for qualifying childcare vouchers);
(v) section 308 (exemption of contribution to registered pension scheme);
(vi) section 308A (exemption of contribution to overseas pension scheme);
(vii) section 309 (limited exemptions for statutory redundancy payments);
(viii) section 310 (counselling and other outplacement services);
(ix) section 311 (retraining courses);
(x) section 318 (childcare: exemption for employer-provided care); or
(xi) section 318A (childcare: limited exemption for other care); or

- it is a payment, or reimbursement of costs incurred by the claimant, in respect of pension advice and that payment or reimbursement is exempt from a charge to income tax under Chapter 9 of Part 4 of ITEPA.

The disregarded benefits are:

At the end of each tax year, claimants who have received benefits in kind should receive a P11d or P9d from their employer listing the value of the benefits they have received. The TC600 guidance notes (page 14) instruct claimants to gather various figures from boxes on the P11d/P9d when working out their total income.

One way of paying tax on benefits in kind involves HMRC adjusting a person’s tax code in the following year to recover the tax owed on those benefits. However, some employers tax benefits in kind by including them in weekly or monthly pay. Although they still issue a P11d/P9d at the end of the year, it means that when a claimant receives their P60 or P45, the total income figure will include some benefits in kind.

In this latter case (where benefits in kind are included in weekly or monthly pay) HMRC instruct claimants to deduct the benefits in kind figure from their P60/P45 income before entering it into the relevant box on the tax credits claim form or renewals form. They should then enter the figure relating to the benefits in kind (from their P11d/P9d) into the relevant box. This avoids double counting of the benefits in kind.

Deductions from employment income

The following tax-deductible items are also deducted from employment income for tax credits:


'Deemed payments' under the IR35 rules for income tax are not included in employment income. The IR35 rules come into play if you are an employee of your own company, and have to pay tax not only on the dividends and salary you receive from the company, but also on the payments your clients make to your company.

Share Incentive Plans (SIPS)

There is no deduction from earnings for any amount of pay that the claimant saves into a Share Incentive Plan (SIP).

Where a person who participates in a SIP exits the plan within 3 years, not for reasons of ill-health, incapacity or redundancy, they must declare the market value of their shares as employment income (under Part 7 ITEPA). This means that for tax credit purposes, not only do they not receive any deduction from income for any contributions they make to the scheme, but if they leave the scheme early, they also have to include the market value of the shares they have acquired as employment income. This is the case even though the money they used to buy those shares has already been declared.

For example:

A person earns £15000 gross per annum and pays £50 gross per month into their SIP, they declare their employment income as £15000 for tax credit purposes as no deduction for the SIP is permitted in tax credits.

The SIP builds to acquire shares to the value of £1200 (£50 per month for 2 years) before the person exits the SIP within 3 years. On leaving the SIP, the shares are transferred to the person and the £1200 is subject to tax under Part 7 ITEPA and they must declare the same money again for the tax credits claim. So their income in the year they leave the scheme will be increased by £1200.

More information about SIPs and the impact on benefits can be found in HMRC’s leaflet IR177 - Share Incentive Plans and Your Entitlement to Benefits (note that this has not been updated since 2011).

Last reviewed/updated 2 May 2023