Contractual and pecuniary liabilities

The definition of ‘earnings’ for the purposes of tax includes anything that is of direct monetary value to the employee. If an employer pays an employee’s bill or meets some other kind of liability that the employee is obliged to pay themselves (often referred to as meeting the employee’s pecuniary liability), this is of direct monetary value to the employee. This employee is assessed on the money that is used to settle their liability, and not as a benefit in kind on what this liability relates to. A payment made on behalf of an employee can be summarised in the following diagram.

For example, where an employer settles an employee’s phone bill, the benefit is not the provision of a phone line / phone calls; it is the amount of money used to settle that bill. As such, it is taxable under ITEPA 2003, s 62.

The payment made by the employer can be a one-off occurrence, eg settling an outstanding parking fine to prevent further proceedings being taken against the employee, or it can be a contractual agreement negotiated as part of the employment package, eg the employer may take over responsibility for paying the employee’s premiums on their existing health insurance policy. In either case, the amount paid by the employer is of direct monetary value to the employee. The employee is taxed on the full amount of the personal liability settled by the employer.

One type of pecuniary liability that an employer may meet is council tax. In most circumstances, if the employer pays the council tax to the local authority on a property occupied by the employee, this is earnings of the employee and is taxed as such. Where an exemption applies, the employer can pay the council tax on the property without it being taxable on the employee. See the Living accommodation guidance note for details of the exemptions and the Council tax guidance note for more details.

If, instead of settling the