Week 3 - Employment Income - Benefits in Kind - Student

ACC5038 - Principles of Taxation (UK)

Overview

Module Title: ACC5038 - Principles of Taxation (UK)Week Focus: Employment Income & Benefits in Kind

Key Reminders

• Watch Videos: Prior material is essential for understanding the topics discussed this week.

• Focus: Special emphasis on Benefits in Kind (BIK) is crucial for taxation calculations.

• Engagement: Active participation and engagement with the material is critical for achieving success in this module; students should take ownership of their learning and results.

Recap of Previous Weeks

• Focused on Income Tax Calculations.

• Students should be familiar with given amounts to tax and the methodologies to calculate these amounts accurately.

Learning Objectives

By the end of this module, students should be able to:

1. Determine Taxable Income: Differentiate between exempt and taxable income.

2. Understand Deductible Expenses: Identify allowable versus disallowable expenses related to employment.

3. Calculate Approved Mileage Allowance Payments (AMAPs): Understand how to compute AMAPs for business travel.

4. Understand and calculate the value of Benefits in Kind (BIK): Apply statutory valuation rules effectively.

   • Cars and Fuel: Calculate benefits based on specific metrics and policies.

   • Beneficial Loans: Navigate the implications of receiving low-interest loans.

   • Assets Loaned for Private Use: Recognize the tax obligations associated with loaned assets.

Exempt Employment Income

Non-Taxable Income Examples:

• Free/subsidized meals provided to employees.

• Employer pension contributions are generally exempt.

• Long service awards given without exceeding specified thresholds.

• Staff parties or events, provided costs do not surpass the annual threshold.

• Free car parking facilities for employees.

• Approved Mileage Allowance Payments (AMAPs).

• Removal expenses that do not exceed prescribed thresholds.

Taxable Employment Income

Common Taxable Income Examples:

• Wages and salaries received by employees.

• Bonuses and commissions that form part of remuneration.

• Expense allowances which exceed allowable amounts.

• Termination payments in excess of £30,000.

• Employment pensions which provide taxable income.

• Benefits in Kind that do not qualify as exempt under specific guidelines.

Deductible Expenses

Definition:

Expenses that are eligible to be deducted from total employment income before tax calculations.

General Rule:

Expenses must be incurred exclusively, wholly, and necessarily in the performance of employment duties to be considered allowable.

Common Deductible Expenses:

• Pension Contributions: Contributions to employee pension schemes.

• Professional Subscriptions: Fees paid for professional memberships that are directly related to employment.

• Travel and Subsistence Expenses: Costs associated with necessary travel required for job duties.

Disallowable Expenses

Definition:

Expenses that cannot be claimed as deductions in tax calculations.

Examples:

• Travel expenses incurred between home and permanent workplace.

• Clothing expenses that do not meet necessary criteria for work uniforms.

• Entertaining expenses, although certain compensations may apply under specific circumstances.

Approved Mileage Allowance Payments (AMAPs)

Definition:

Payments made to employees as compensation for using their personal vehicles for business purposes.

HMRC Approved Amounts:

These amounts can vary based on the type of vehicle being used.

Tax Implications:

• If the employer pays more than the approved rate, the excess amount is subject to taxation.

• If the employer pays less, employees can claim the difference through allowable deductions.

Rates for AMAPs

Specific rates per mile are established according to the vehicle type (e.g., motorcars, bicycles).

• First 10,000 miles traveled in a tax year are typically exempt from tax.

• Additional miles beyond 10,000 can attract different rates.

Worked Example 1

Scenario:

Dr. Ishaque's travel involved 12,000 business miles.Employer Payments:

• 47p per mile for the first threshold.

• 37p per mile thereafter.

• Employers may not pay for some business miles.

Worked Example 1 - Solutions

Solutions are provided through Birmingham City University to demonstrate the tax computation.

Worked Example 2 - Peter

Financial Overview:

• Salary: £42,000 annually.

• Employer Pension Contributions: £4,000 annually.

• Mobile Phone Benefit: £42/month, subject to taxation.

• Business Travel: 11,000 miles charged at 46p per mile.

Worked Example 2 - Solution

Detailed solutions provided by Birmingham City University for tax calculations.

Practice Questions

Practice 1 - Michelle

• Practice question regarding benefits (P.265 Q33).

Practice 2 - Martin

• Practice question discussing contributions to running costs (P.265 Q32).

Practice 3 - Howard

• Consideration for duration a loaned asset is available (P.264 Q30).

Practice 4 - Erin

• Related to employment income computations with a focus on specific calculations (Q44 p.267).

Benefits in Kind (BIK)

Definition:

Non-cash income received, which can include tangible goods and services supported by the employment.

Taxation:

All BIK types are subject to income tax and National Insurance Contributions (NIC).

Tax Calculation:

Value is typically determined based on the cost incurred by the employer for each benefit provided.

Statutory Valuation Rules

Specific rules apply to the following benefits:

• Cars and fuel utilized for private purposes.

• Beneficial loans taken at preferential rates.

• Assets loaned for private use by employees.

Cars Provided for Private Use

Tax Implications:

If private use is not reimbursed, tax liabilities may accrue.

Calculation Basis:

Calculated as the list price less any employee contribution multiplied by a percentage based on CO2 emissions.

Key Points for Vehicle Taxation

• Diesel vehicles incur an additional supplement unless they meet compliance standards.

• Specific rates apply for vehicles based on their CO2 emissions.

Fuel Provided for Private Use

Taxable Benefit:

This is triggered when an employer pays for private fuel usage.

Criteria for Exemption:

When employees bear all fuel costs.

Beneficial Loans

Definition:

Loans provided at reduced rates compared to the official interest rate set by HMRC.

Tax Calculation:

Involves adjustments based on the actual interest the employee pays to avoid tax discrepancies.

Changes during the Year for Beneficial Loans

Methodological Consideration:

Variations in calculations can depend on whether an average method or a precise method is applied based on loan metrics.

Assets Loaned for Private Use

Taxation:

Assets are taxed annually based on their market value at the point of loan issued to the employee, ensuring compliance with tax laws.