A business can provide each employee with one mobile phone free of tax and National Insurance, even if the employee uses it privately. The key condition is that the employer provides the phone, meaning the contract is between the employer and the network provider.
If the employee holds the contract and the business pays the bill, the exemption does not apply and the payments are taxable as salary. The difference is entirely in the paperwork, so it is worth getting right.
How the exemption works
The exemption covers one mobile phone per employee, including the handset, line rental and calls. Smartphones count as mobile phones. There is no limit on the cost of the phone or the contract, and private use does not affect the exemption.
Because the benefit is exempt, there is nothing to report on a P11D and no Class 1A National Insurance. The business can claim the cost as a deduction, and for a VAT registered business, VAT on the contract can usually be reclaimed in line with business use.
The exemption applies to directors in the same way as other employees, which makes it useful for owner-managed companies.
Whose name is on the contract
This is where most problems arise. The exemption only applies where the employer provides the phone. In practice, that means the contract should be in the name of the business, with the business paying the provider directly.
If the employee already has a personal contract and the business pays or reimburses the bill, HMRC treats this as paying a personal bill on the employee's behalf. It must go through payroll as salary, with income tax and Class 1 National Insurance. The business can reimburse the cost of specific business calls without tax if they are itemised, but not the line rental.
If an employee wants to keep their existing number, it can usually be transferred to a business contract.
A worked example
A director, who is a higher rate taxpayer with earnings above £50,270, has a phone contract costing £40 a month, or £480 a year.
Contract in the company's name. No income tax or National Insurance. The company claims £480 as a deduction.
Contract in the director's name, paid by the company. The £480 is treated as salary for 2026/27:
- Income tax at 40 percent: £192
- Employee National Insurance at 2 percent: £9.60
- Employer National Insurance at 15 percent: £72
That is £273.60 of tax a year for the same phone. Across several staff it adds up quickly, and it is easily avoided.
What is not covered
- A second phone. The exemption is for one phone per employee. A second phone provided for private use is a taxable benefit.
- Phones for family members. A phone provided for an employee's spouse or children is taxable on the employee, unless the family member is also an employee in their own right.
- Tablets and laptops. These are not mobile phones, even if they can make calls. They may be exempt as work equipment if they are provided mainly for work and private use is insignificant.
- Vouchers or cash. A phone allowance paid in cash is taxable pay.
Sole traders and partners
If you are self-employed, there is no benefit in kind to worry about for yourself, but only the business proportion of your phone costs is deductible. If you use one phone for both business and personal calls, make a reasonable estimate of the business use and keep a note of how you worked it out.
If you employ staff, the same one phone per employee exemption applies to phones you provide to them.
What to do
- Check whose name is on each phone contract the business pays for.
- Move any personal contracts the business pays into the business's name, porting numbers where needed.
- Limit tax-free provision to one phone per employee.
- Put any phone payments that cannot be moved through payroll correctly.
If you would like us to review your phone and benefits arrangements, book a free call.
