Are staff discounts taxable

A staff discount is a benefit, but for tax purposes it is measured by what the goods or services cost the employer to provide, not by their retail price. If the employee pays at least that cost, the cash equivalent under the benefits code is nil and nothing is taxable. Only where the discounted price falls below the employer’s cost, or below what the item could be sold for second hand, does a charge arise.

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How does HMRC tax a staff discount?

Two parts of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) can apply. The first is the benefits code. Section 203 treats the cash equivalent of an employment related benefit as earnings, and defines the cash equivalent as the cost of the benefit less any part of that cost made good by the employee. Section 204 then says the cost is the expense incurred in or in connection with providing the benefit, including a proper proportion of any expense that relates partly to the benefit and partly to other things.

HMRC’s Employment Income Manual at EIM21704 applies this directly to discounts. If the discounted price the employee pays exceeds the expense the employer incurred in providing the goods or services, the cash equivalent is nil, because the employee has made good more than the cost of the benefit.

The second route is the general earnings charge in section 62 ITEPA 2003. EIM01090 explains that a discount on its own is not earnings under section 62, because it cannot be turned into money. The employee only has section 62 earnings if what they pay is less than the second hand value of the goods. The two tests run side by side, so an employer has to look at both.

What counts as the cost to the employer?

EIM21704 says the expense of providing the benefit includes the cost of producing or acquiring the goods or services, a proportion of overheads directly related to that production or acquisition, and any taxes or duties the employer pays on them. It does not mean the full retail price, and it does not include the profit margin the employer would have earned from a customer.

For things the employer sells to the public anyway, the leading case is Pepper v Hart. Teachers at Malvern College had their sons educated at the school for no more than 20% of the normal fees, filling surplus places. The House of Lords held that the cost of the benefit was the marginal additional expense of providing it, not a proportion of the full cost of running the school. HMRC’s guidance at EIM21110 describes this as the expense the employer would have saved had the benefit not been provided.

EIM21111 gives two contrasting examples. Where an employer runs a lecture course for the public with fixed costs and gives an employee a free place, the marginal cost is nil. Where a brewer sells beer to staff at a discount, the marginal cost includes the ingredients, the excise duty on the employees’ beer and any overheads that would have been saved, such as extra heating, staff or transport. EIM21110 notes that where goods or materials are supplied there will almost always be some additional expense.

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When does no tax charge arise?

The employee pays at least the employer’s cost of the goods or services, worked out as above, and the price is not below the second hand value of the goods.
The benefit is a service using spare capacity where the employer incurs no extra cost, as in the lecture example.
The employee makes good the shortfall. Section 203(2) counts amounts made good to the provider on or before 6 July following the end of the tax year in which the benefit was provided.
The employer has negotiated a discount with a third party but pays nothing itself. The joint HMRC and government Fitness at Work guidance says that a discount the employer negotiates is not a taxable benefit where the employer has not incurred an expense in obtaining it.

Can the second hand value create a charge even when cost is covered?

Yes, in principle. EIM21704 points out that even where there is no benefits code charge, section 62 can bite if the second hand value of what the employee buys exceeds the price paid. EIM00540 explains that the amount taxed under section 62 is what the employee could get for the item if they disposed of it as soon as they received it.

For new stock sold to staff, EIM21646 sets out the rule for assets transferred before they have been used or depreciated, which also covers unused trading stock. The amount chargeable is the greater of the employer’s expense less any amount made good, and the second hand value (if chargeable under section 62) less the amount the employee pays. In practice most consumer goods have a second hand value well below retail price, so this rarely produces a higher figure, but high value items that hold their price need checking.

How does this work in practice?

Illustration only. A clothing retailer sells a coat for £100. The coat cost the retailer £45 to buy in, and the retailer attributes £5 of directly related handling and distribution overhead to it, giving a cost of £50.

Staff discount	Employee pays	Cost to employer	Benefits code charge
40%	£60	£50	Nil
50%	£50	£50	Nil
70%	£30	£50	£20

At a 70% discount there is a £20 benefit. If the coat’s second hand value were, say, £25, the section 62 figure would be nil because the employee paid more than £25, so the benefits code amount of £20 is the one that counts. If the employee paid the extra £20 back by 6 July after the tax year end, the cash equivalent would fall to nil.

How are taxable discounts reported?

Where a discount does produce a cash equivalent, it is a benefit in kind like any other. GOV.UK guidance for employers says taxable benefits must be reported to HMRC, either through payroll during the year or on a P11D after the end of the tax year, and that Class 1A National Insurance is reported on form P11D(b). See our guides to benefits in kind and the P11D, payrolling benefits and Class 1A National Insurance.

Before 2016 to 2017, employees earning below a threshold were in excluded employment and outside most of the benefits code, which is why EIM21704 still refers to excluded employment for 2015 to 2016 and earlier. For current years there is no such carve out, so the benefits code applies to all employees and directors. Where the amounts are small and spread across many staff, GOV.UK notes that minor benefits may instead be settled through a PAYE Settlement Agreement.

What mistakes do employers make with staff discounts?

Valuing the benefit at the retail price or the discount percentage, rather than at the employer’s actual cost of provision.
Ignoring duties and taxes. EIM21704 includes them in the cost, so a drinks or tobacco business must count the duty paid on goods sold to staff.
Assuming services are always free of charge. If the service uses consumables or extra staff time, there is a marginal cost to compare against what the employee pays.
Overlooking very deep discounts on items that keep their value, where the second hand value test in section 62 can produce a charge.
Not keeping a record of how cost was worked out. In an HMRC employer compliance check, the employer needs to show its cost calculation, not just its discount policy.

Are discounts from other businesses treated the same way?

Where the employer itself pays for the discount, for example by subsidising a supplier’s price, the employer’s expense is the cost of the benefit and the usual rules apply. Where the employer simply negotiates a deal and pays nothing, the Fitness at Work guidance indicates there is no taxable benefit from the discount itself. Benefits provided directly by third parties raise separate questions, covered in our guide to gifts from third parties to employees.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.