A tax allowable deduction is payment(s) taken out of an employee's gross pay (the salary before tax) that reduces the amount of income that the employee is actually taxed on.
Example: if an employee earns £3,000 a month but has £200 in allowable deductions, HMRC only looks at the remaining £2,800 when calculating the PAYE tax due.
Here are the most common tax-allowable deductions for employees:
1. Pension Contributions
If a Net Pay Arrangement or Salary Sacrifice pension scheme is used, the pension contribution is taken out of the salary before PAYE tax is calculated.
- Result: The employee gets full tax relief immediately because that portion of the salary never reaches the "taxable" stage.
2. Salary Sacrifice Schemes (other than pensions)
This is where you "swap" part of the cash salary for a non-cash benefit. Because the gross salary is officially lowered, the employee pays less tax and National Insurance. Common schemes include:
- Cycle to Work: Paying for a bike and equipment through monthly payroll deductions.
- Low-Emission Cars: Leasing an electric car through your employer.
- Childcare Vouchers: (Note: This is mostly closed to new applicants, replaced by Tax-Free Childcare).
3. Payroll Giving (Charity)
If the employer offers a "Payroll Giving" scheme, employees can donate to charity directly from their pay.
- Benefit: The donation is taken before tax. Example: If the employee wants to give £10 to charity, it only "costs" the employee £8 (if you’re a 20% taxpayer) because that £10 isn't taxed.
4. Professional Fees and Subscriptions
If an employee must be a member of a professional body to do their job (e.g., a nurse paying RCN fees or an accountant paying ICAEW fees), these can sometimes be tax-deductible.
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