The taxable value of living accommodation provided to employees is determined based on several factors. The primary components used to calculate this value include:

  1. Annual Value: This is generally the rental value of the property, calculated as the annual rent that would be paid for the property if it were let out on the open market.
  2. Additional Charge: If the property cost more than £75,000, an additional charge is applied. This is calculated by taking the original cost of the property (plus the cost of any improvements) and multiplying it by the official rate of interest set by HMRC. The official rate is subject to change and is updated periodically by HMRC.
  3. Expenses: Any expenses paid by the employer that benefit the employee, such as utilities, maintenance, and council tax, are also considered when calculating the taxable benefit. These costs are added to the annual value of the accommodation.
  4. Rent Paid by Employee: If the employee contributes towards the cost of the accommodation, this amount is deducted from the total taxable value.

Example Calculation

For instance, if the annual market rent of the property is £10,000, and the property cost £100,000, with the official rate of interest at 2.5%:

  • Annual Value: £10,000
  • Additional Charge: (£100,000 – £75,000) * 2.5% = £625
  • Total Taxable Value: £10,000 + £625 = £10,625

If the employee pays £2,000 in rent:

  • Taxable Benefit: £10,625 – £2,000 = £8,625

Employers must ensure they calculate and report these values accurately to HMRC on the employee’s P11D form.