Last updated: 14 October 2026
How do you avoid NIC on telephone bills in a PAYE inspection?
The key is who holds the contract. If the employer has the phone or landline contract in its own name and pays the provider, the costs are either exempt (one mobile phone per employee) or treated as a benefit in kind reported on a P11D, with Class 1A NIC only on the private element. If the contract is in the employee’s name and the employer pays the bill or reimburses it, HMRC treats it as paying the employee’s personal debt, which is earnings subject to Class 1 NIC through payroll. In an inspection, HMRC will look closely at this.
Treatment by type of phone
| Arrangement | Income tax | NIC |
| Mobile phone, contract in employer’s name | Exempt | None |
| Landline at employee’s home, contract in employer’s name | Line rental benefit unless business use only; private calls taxable | Class 1A on benefit |
| Landline or mobile in employee’s name, employer pays bill | Taxable earnings | Class 1 NIC |
| Employee’s own contract, employer reimburses itemised business calls only | Exempt | None |
| Home broadband in employee’s name, needed for work | Taxable unless only business use and reimbursed exactly | Class 1 NIC |
What inspectors check
- Contracts and invoices to see whose name is on them
- Whether reimbursements are for specific calls or the whole bill
- Whether payments went through payroll
- P11D entries for landline benefits
Example
During a PAYE compliance check, HMRC finds a company has paid the home landline and broadband bills of its 3 directors, £1,200 a year each, with contracts in the directors’ names. HMRC treats this as earnings and asks for Class 1 NIC of 15% employer and 2% employee (as the directors are higher rate), plus PAYE, for 4 years. Had the contracts been in the company’s name, only the private use would have been a benefit with Class 1A, and the mobile phones would have been exempt.
Putting it right
- Transfer contracts into the business name where possible
- Reimburse only itemised business calls on employees’ own contracts
- Run any whole-bill payments through payroll
- Disclose errors to HMRC voluntarily to reduce penalties
Penalties
If an inspection finds errors, HMRC charges the tax and NIC due, interest and a penalty based on behaviour. Careless errors carry penalties of up to 30% of the tax, reduced if you disclose and cooperate.
Common mistakes
- Paying employees’ personal contracts through expenses
- Assuming broadband for homeworkers is exempt
- Providing a second mobile phone
- Not keeping the contracts the inspector will ask for
Homeworkers
Employees who work from home sometimes ask the employer to cover a share of their broadband. If the broadband was already in place for personal use, reimbursing part of it is taxable. If a new line is installed only for work and restricted to business use, paying it directly can be exempt. Record the reason for any arrangement so you can explain it during an inspection.
Frequently asked questions
How far back can HMRC go?
4 years for innocent errors, 6 for careless.
Can a PSA cover phone bills?
Not usually, as they’re regular.
Are SIM cards for tablets exempt?
No, only phones.
Can I agree a business percentage?
For employer-contract landlines, yes.
Related: pay-as-you-go phones, providing mobiles to employees and employee reward schemes.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with PAYE compliance. See our payroll services service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
