chapter 3 - employment income

contract of service

taxpayer works for the other party over a period of time, performing diff tasks. rs is ongoing so this makes them employed

contract for service

taxpayer has agreed to perform specific task/s. once these are complete, the rs is finished. this makes them self-employed

things to consider if it is a contract of service or contract for service

• degree of control exercised over the person doing the work (control implies employment rs)

• whether they must accept further work (obligation = employment)

• whether the other party must provide further work (obligation = employment)

• whether they provide the their own equipment (using someone elses implies employment)

• whether they hire their own helpers (hiring helpers implies autonomy = self employed)

• what degree of financial risk they take (SE more risky)

• what degree of responsibility for investment and management they have (SE more responsibility)

• whether they can profit from sound management (SE benefit directly from good decisions they make)

• whether they can choose where to work

• wording in agreement between parties

types of income

• salaries, bonusses and comissions

• non-cash benefits, eg company car

• payments made on termination of employement

normal rules

earnings are treated as received at earlier of:

• time payment is made

• time when person becomes entitled to payment of their earnings)

rules for directors

their earnings are treated as being received on the earliest of:

• when payment is made

• time person becomes entitled to payment of the earnings

• time the amount is credited to the company’s accounting records

• end of the company’s period of account

• time the amount is determined (if after end of companys period of account)

general rule for taxable benefits

• no taxable benefits if there is no private benefit to the employee

• time apportion the benefit is not available for entire tax year

• deduct any contributions made by the employee from the benefit

tax on cars

• benefit received if car is provided by employer to employee for private use (if fuel is provided that is an additional benefit)

• HMRC considers commuting to work as a private benefit

• calculated by % of list price (% is determined by CO2 emissions) - capped at 37%

• list price is calculated by: list price when new + optional extras costing at least 100. deduct capital contributions made by employee, capped at 5000.

• benefit is time apportioned

• benefit is reduced if payments for private use are made

pool cars

pool cars are exempt. a pool car consists of:

• used by more than one employee/director

• any private use is minimal compared to business use

• not normally kept overnight near residence of employee

fuel benefit

• if fuel is provided for private miles, there is further benefit in addition to car benefit

• taxable benefit is % of base figure (28,200)

• % is same as car benefit

• no benefit if employee pays for private fuel

• no reduction if fuel is partly reimbursed

benefit of use of asset

• if employee is allowed to use an asset owned by the employer for private purposes, they will be assessed on the higher of: 20% value when first made available to employee and rental paid by employer

tax on transfer of gift of asset

if an employee is given an asset that previously belonged to their employer, they will be assessed on:

• if already used by employee, then higher of market value when given and original value when first used less value already assessed

• if new asset is given, then employee will be assessed on the cost of provided asset

• if asset is computer, benefit can only be of current market value

• deduct from the benefit any payment the employee makes for the asset

beneficial loans

• when employer gives employee interest free loan or charges less than a commercial interest rate.

• benefit is the difference between the interest that shouldve been charged (3.37%) and interest paid by employee

• no benefit if loan in the year is <10,000

• if limit is broken, then all loans are taxed

formula to calculate benefit of loans

when the size of the loan has changed during the year, the interest is calculated on either:

• average loan outstanding in the year

• loan outstanding on month by month basis

use lower of both

job related accommodation

• employee with job-related accom is not taxed

• accom is provided for security reasons, necessary for performance, customary for job (eg pub owner living on top/near pub)

taxable benefit on non job related accom

calculated in two stages:

• the greater of annual value or rent paid by employer, minus what employee pays

• additional charge if employer owns building and its valued >75,000

• (cost - 75000) X official rate of interest

• if building is acquired for more than 6 yrs by employer, then additional charge is based on MV at the start of the tax yr in which employee moves in

benefit on living expenses

• job related accom:

lower of cost of expenses to employer and 10% * net earnings (including other benefits)

• non job related:

cost of expenses to employer

expenses include: heating,etc, repairing, maintaining, decorating, providing furniture (AV taken at 20% of cost)

taxable benefits on vouchers

• employee is taxed on cost incurred by employer in providing voucher (ie cost of voucher) or credit card

• if employee receives cash voucher, they are taxed on the amount that voucher can e exchanged for

vouchers that are exempt are in tax reference materials

allowable deductions

• fees and subscriptions to professional bodies

• travelling and other expenses for performance duties

• contributions to pension schemes

• donations under payroll deduction scheme

allowable business expenses

• exclusively incurred in the performance of their duties

• qualifying travel expense

• professional fees and subscriptions

allowable expenditure for temporary workplace

• employee is sent to a temporary workplace for <24 months, commuting from home is allowable

AMR

• approved mileage allowance payments scheme

• authorised mileage that employees can claim allowance for business journeys made in their own car

entertainment expenses

• employer gives employee allowance to cover expenses

• this is an additional salary, so taxable, but employee may claim a deduction for expenses actually incurred

• however, employee cant make a claim against the fixed allowance employer provides for these expenses

• bc the employer is making a deduction against their profits for paying the employee the allowance

contributing to a pension

maximum tax relief available for pension contributions each year is higher of:

• 3600

• earnings for the year

additional contributions are permitted but no tax relief if available

tax relief via pensions

• taxpayers income is reduced by the payment into the pension scheme

• so they are not paying tax on the amount that is paid to the pension scheme

• so they save tax they would have paid on this

• dependant on type of pension scheme

types of pension schemes

• personal pension scheme: organised by taxpayer, contributions paid net of basic rate tax (20%)

• occupational scheme: provided by employer. contributions deducted directly from earnings. PAYE applied to remaining income (net pay arrangement)

employer contributions to pension

employer can contribute to occupational or personal on behalf of employee

not taxable benefits on employee

no limit

payroll deduction scheme/ GAYE

employees request employer payd some of their salary to charity. donation is deducted from gross salary before PAYE is deducted. saves taxpayer tax

tax planning

• select exempt benefits over taxable benefits

• select benefits with lower cash equivalents rather than higher on

• ensure contributions made to private use f employers car is for USE of car not fuel (fuel is not deductible)

• pay into company pension scheme

• claim allowable deductions

• avoid overtime

• seek rewards in benefits rather than cash as no NI cost on benefits