Introduction »

Working for others

Few avoid working for others at some time in their life and most will have encountered the PAYE system operated by employers to collect the income tax and national insurance contributions (NIC) due on wages and salaries.

The tax code

Ensuring the right amount of tax is taken relies on a PAYE code, issued by HMRC and based on information given in a previous self assessment return or supplied by the employer. The employee, not the employer, is responsible for the accuracy of the code.

Code numbers try to reflect both your tax allowances and reliefs and also any tax you may owe on employment benefits. For many employees things are simple. They will have a set salary or wage and only a basic personal allowance. Their code number will be 747L and the right amount of tax should be paid under PAYE. However, for those who are provided with employment benefits (see below for examples of common benefits) the code number is generally adjusted to collect the tax due so that there are no nasty underpayment surprises.

For those who receive both a state pension and other pensions or employment income, an adjustment is usually made so that the state pension uses your tax allowances first leaving a lower code number available to be used against other sources of pension income. This is to ensure that as far as possible pensioners are not left with a tax bill on their state pension.

HMRC may also try to collect tax on untaxed income or tax owing from an earlier year. The code may even try to allow for higher rate tax that has to be paid on investment income. You do not have to agree to tax owed on untaxed income and prior years’ underpayments being dealt with in this way.

With this many complications and some guess work involved, getting the code exactly right can be difficult and the right amount of tax will not always be deducted.

Benefits

The range of benefits available will vary significantly depending on the type of employment. Some attract no tax but even taxable benefits can be efficient as the benefit obtained by the individual can often outweigh the tax cost arising. In addition, for the individuals (but not the employers) benefits generally do not attract NIC.

Company cars

Employer provided cars, commonly known as company cars, remain a popular benefit and for some a real status symbol, despite continued increases in the tax charge they give rise to.

The charge on cars is calculated by multiplying the list price of the car by a percentage which depends on the CO2 emissions of the car. You then pay tax at 20, 40 or 50% on this charge depending on your overall tax position.

The table below shows the percentages for 2011/12. For those with CO2 emissions at or above 125 grams per kilometre (g/km) however, the taxable benefit is 1% higher compared to 2010/11.

The CO2 emissions of most cars can be located on the internet and officially has to be recorded on the Vehicle Registration Document.

If the car has a diesel engine the charge is increased by 3% (except that it cannot exceed 35%).

Percentage charges for 2012/13

From 6 April 2012 the CO2 emissions bands used to work out the taxable benefit for an employee who has the use of a company car will be shifted down by a further 5g CO2 per km.

This means that a car with 120g CO2 per km will attract a 15% charge. In addition, the current graduated table of company car tax bands will be extended down to a 10% band as shown opposite.

Fuel for private use

A separate charge applies where private fuel is provided by the employer for a company car. The charge is calculated by applying the same percentage figure used to calculate the company car benefit to a fixed figure which for 2011/12 is set at £18,800.

Medical insurance

The employee is taxed on the amount of the premium paid by the employer.

Home and mobile phones

There is no benefit on the provision of a company mobile phone even where it is used privately. However, this is limited to one phone per employee.

Where home telephone bills are paid by the employer, the amount paid will be taxable.

The employee may make a tax deduction claim for the cost of business calls only but not the line rental which is treated as private.

Cheap or interest free loans

If loans made by the employer to an employee exceed £5,000 at any point in a tax year, tax is chargeable on the difference between the interest paid and the interest due at an official rate - currently 4%. An exception applies for certain qualifying loans - please contact us for information.

Childcare costs

Childcare costs paid for by an employer are exempt from both income tax and NIC. This applies to a place in an employer operated nursery or where the employer pays for registered or approved childcare. In this latter case the exemption is limited to a maximum of £55 per week and any excess over this is subject to tax and NIC.

From 6 April 2011 new joiners to a childcare scheme who are higher or additional rate tax payers will only be entitled to £28 or £22 a week of exempt childcare respectively.

The costs will normally be paid in the form of vouchers or alternatively paid direct to the childcare provider. Any scheme must be open to all employees or all employees at a particular location.

Approved childcare includes registered child minders, nurseries and play schemes, out of hours clubs run by a school on the school premises or by a local authority and childcare schemes run by approved providers.

Expense payments

Reimbursed expenses

Reimbursed expenses are taxable as a benefit but the employee can claim a deduction for those expenses incurred wholly for business purposes. The overall effect is usually neutral.

What happens is that at the end of each tax year, the employer sends a summary, to HMRC, of all benefits provided on a form P11D for each employee. As well as the benefits covered earlier, this form will include all reimbursed expenses.

The employee can then make an expense claim to HMRC either on a self assessment return or by letter for any business expenses so that these are not taxed.

Because, often, nothing is taxable, employers can ask to be excluded from the expense reporting process if they apply to HMRC. This is known as a dispensation.

Mileage claims

Many employers pay a standard rate of mileage to all employees who use their own cars for business journeys. HMRC set statutory rates for business mileage which, from 6 April 2011, are 45p for the first 10,000 miles in a tax year and 25p thereafter. If the employee is paid for business miles at less than the statutory rates, tax relief is available on the difference. If, however, the employee is paid at more than these rates then the excess is taxable.

Mileage payments do not have to be shown on the form P11D unless the rates paid are more than the statutory rates.

Other transport issues

Vans

Where employees are provided with a van and the only private use of this is to go to and from work (including any incidental private use), then no taxable benefit should arise. If there is private use beyond this, there is a benefit of £3,000 per annum and an additional £550 if fuel is provided for private as well as business journeys. In order to avoid this charge, it is advisable to have a formal, written policy and detailed mileage logs. These will support the limited private use of the van and may avoid problems with HMRC in the future.

Introduction »