Ch 4 - Employment income Flashcards
What is employment income/
Money or money’s worth arising from employment
What is the employment income working?
Salary
Bonus
Benefits
Totals Employment
How is tax on employment reported to HMRC?
Income tax and NIC on employment income is deducted by employers through the PAYE system
Most employers must report PAYE info in real time
What is the implication of the fact that employers must report PAYE info in real time?
Means each time a payment is made to an employee, the details of his/her pay and deductions must be submitted to HMRC using payroll software
What is a P60?
At the end of the tax year, employer completes a form P60 for each employee.
Gives the following details for the tax year:
- Gross pay
- Tax deducted
- NICs paid by both employee and employers
When must P60 be supplied?
Must be supplied to each employee by 31 May following the end of the tax year
What basis is employment income taxed upon?
receipts basis
TYU1: Betty receives her salary on the last day of the calendar month
In year to 31 Dec 2018, salary was £2,000 per month
in year to 31 Dec 2019 her salary is £2,100 per month
Calc employment income for tax year 18/19 and state the date by which employer must provide this info to her by form P60
April to Dec (9 months x £2k) = £18k
Jan - March 19 (3 months x £2,100) = £6,300
Employment income = £24,300
At the end of the tax year, Betty’s employer will complete form P60, giving details of gross pay, tax deducted and the employer and employee NICs paid
Betty’s P60 for tax year 18/19 must be supplied by 31 May 2019
Give some examples of benefits provided by an employer that are exempt from income tax
- Employer’s contributions into registered pension scheme
- Pension advice and associated tax planning available to all employees up to £500 per tax year (above which the full amount is taxable)
- Use of free/subsidised on-site canteen (must be available to all employees)
- provision of car parking space at/near work place
- Mobile phone (1 per employee for private use)
- Up to £150 per head per year for social events
- Entertainment provided by a third party
- Non-cash gifts from third parties (up to £250 pa per donor)
- Workplace nurseries/childcare
- Workplace buses and subsidies to use public bus services
- use of bicycles (and cycling safety equip) if available to all employees
Vouchers for approved childcare for those already in scheme at 6 April 2011 - £55 per week is exempt. - Vouchers for those joining 6 Apil 2011-4 Oct 2018, exemption is £55 per week for basic, £28 per week for higher rate, £25 for for additional rate taxpayers from 6 April 2013 (£22 between 6 April 11- 5 April 13)
- Removal expenses up to £8k
- Awards up to £5k made under staff suggestion scheme
- Work related training courses
- Personal incident expenses when working away from home (£5/night and £10 if abroad)
- Glasses and eye tests for employees who use VDUs
- One each per year of health screening assessment and medical checkup
- Sports facilities available to employees but not general public
- Payment towards costs of working from home (need supporting doc if over £4/wk)
- Non-cash long services awards for 20+ yrs service, max £50/yr of service
- Travel expenses when public transport is disrupted, late night journeys and care journey and car sharing arrangements break down
- Up to £500/yr for recommended medical treatment to help employees return to work
TYU2: Shilpa (not director) receives a monthly salary of £3,500 from her employer, Larimar ltd where she is employed as a tax adviser. In addition, received the following bonuses:
Received 31 May 18 relating to Larimar’s profit for y.e 30 Nov 2017 of £3,750
Received 31 May 2019 Larimar’s profits for y/e 30 November 2018 of £4,375
Which bonus(es) should be taxable in 18/19?
Salary = £3,500 x 12 = £42k
Bonus (May 18) £3,750
Employment income £45,750
When are eye tests exempt from income tax?
When people use VDUs
What is the amount of exempt benefit from income tax for non-cash gifts from third parties?
up to £250 per donor
When is the use of bicyles an exempt benefit from income tax?
When it is available to all employees
What is the limit for removal expenses to be exempt from income tax?
£8,000
What is the limit for awards to staff under a suggested scheme to be exempt from income tax?
£5,000
When are travel expenses exempt benefits from income tax?
When public transport is disrupted, late night tourneys or whee car sharing arrangements break down
When is medical treatment exempt from income tax?
Up to £500 for recommended medical treatment to help the employee return to work
One each per year of health screening assessment and medical check up
Glasses and eye test for employees who use VDUs
What is a trivial benefit provided by employers to employees that is exempt from income tax?
- Cost of providing the benefit doesn’t exceed £50
It isn’t cash or cash voucher
It isn’t provided in recognition of services
If any of these aren’t met, the benefit is taxed in the normal way
There is an annual cap of £300 in respect of such benefits when provided to certain directors
What is the general rule for taxable benefits?
If a benefit is provided by an individual’s employer the employee is taxed on the cost to the employer, less any contributions made by the employee
If the benefit is provided in house (e.g. Kaplan employee taking course at kaplan) the employee is taxed on the marginal cost to the employer, less any contributions made by the employee
What must be provided in relation to taxable benefits, and when
After the end of the tax year
Employer must provide HMRC with details of the benefits provided to each employee during the tax year using form P11D
How are vouchers treated differently?
They are treated differently depending on the type of voucher
What is the tax treatment of cash voucher?
Cash voucher or card exchangeable for cash is taxed at amount for which the voucher can be exchanged
What is the treatment of credit tokens as a voucher?
Cost to the employer, less any amount paid to the employee
What is a credit token?
Usually a card, which can be used to obtain money, goods or services
What is the treatment of non-cash vouchers as a voucher?
Cost to the employer, less any amount paid to the employee
How are vouchers for approved child care taxed?
They are exempt
Define a non-cash voucher
Voucher or card exchangeable for goods or services
How is job related accommodation taxed?
Provision of living accommodation isn’t taxable if it is job related
For directors to qualify for necessary or customary job-related accommodation he/she must
- Own no more than 5% shares in company
- To be full time working director (unless the company is charity/non-profit making)
What specifications must be met for accommodation to be ‘job related accommodation’?
- Necessary for performance of duties (e.g. caretaker)
- Customary to be provided e..g police officers
- Provided for security e.g. soldier barracks
What must it take for directors to qualify for their living accommodation to not be taxable?
Own no more than 5% shares in company
- To be full time working director (unless the company is charity/non-profit making)
What is the tax rules on other living accommodation?
If it is provided by an employer, but isn’t job related- the taxable benefit depends on whether the employer owns or rents the property
In both cases, the benefit should be the apportioned for part availability and any rent paid by the employee is deducted from the value of the benefit
- If employer rents the property
The benefit is the higher of the rateable value (given in Q) and rent paid by employer - If employer owns the property
Basic benefit is Rateable value (given in Q)
Additional benefit if the original cost of the house exceeds £75k
Additional benefit is calc (Cost - £75k) * official rate of interest at start of tax year
(‘cost’ is generally the original value when the property was purchased by the employer)
What is the tax benefit of living accommodation that is not job related when the employer rents the property?
The benefit is the higher of the rateable value (given in Q) and rent paid by employer
What is the tax benefit of living accommodation that is not job related when the employer owns the property?
Basic benefit is Rateable value (given in Q)
Additional benefit if the original cost of the house exceeds £75k
Additional benefit is calc (Cost - £75k) * official rate of interest at start of tax year
(‘cost’ is generally the original value when the property was purchased by the employer)
If the employer owned the property for more than 6 years before employee moved in use the market value at the date the employee moved in as the ‘cost’ for calculating the benefit
Include any capital improvements between the date on which ‘cost’ is determined (date of purchase/employee moving in) up to the start of the tax year
- Official interest rate from 6 April 2017 is 2.5% (given in Q if needed, but isn’t on tax tables)
What can be a tax benefit in addition to accommodation for employees?
Living expenses for accommodation
Further benefit for related living expenses paid for by the employer, such as
- Heating and lighting
- Claeaning
- Repairs
- Decoration
Benefit is the cost to employer less any employee contribution
TYU3: William is provided a flat to live in by his employer throughout 18/19 that is non job-related.
Flat has an annual value of £4,000 and the employer pays rent of £400/month. William contributes £100 per month.
What is William’s tax benefit for 18/19?
Benefit = higher of Annual value (£4k) Rent paid by employer (£400 x 12) = £4,800
Therefore £4,800
less employees contributions £100 x 12 = £(1,200)
Taxable benefit = £3,600
What is the tax benefit on cars provided for private use?
Benefit = manufacturer’s list price x CO2 emissions %
Includes optional extras
Deduct any capital contribution made by the employee (up to max £5k)
TYU4: John was provided with a house by his employer. It cost his employer £160,000 in June 2014 and £40,000 was spent on improvements in Dec 2014. House has an annual value of 4,000 per annum.
Calculate John’s taxable benefit for tax year 18/19
Basic charge (annual value) £4,000 Expensive accommodation benefit (£160k + £40k - £75k) x 2.5% = £3,125
Total taxable benefit = £7,125
How do you calculate the additional percentage for CO2 emissions that go above the 95grams @ 20%?
Round DOWN to nearest 5g/km
4% supplement for diesel cars unless they meet the Real Driving Emissions Step 2 (RDE2)
Maximum = 37% for both petrol and diesel cars
Deduct value of the benefit any amount contributed by the employee
There is no car benefit for genuine pool cars
Benefit covers the running costs of the car, including insurance, maintenance and road tax- but a separate benefit is taxable if the employer provides private fuel for the car
TYU5: Adam’s employer Eden Events Ltd bought a house in May 2009 for £140k. The house was made available to Adam in April 2017 when the market value was £230k.
£40k was spent on improvements in June 17, and in May 18 Adams employer spent £60k on an extension to the house.
The house has an annual value of £6k per annum.
Doing the tax year, Eden Events spent £50/month cleaning the house
Calc Adam’s total tax benefit in respect of the house for 18/19
State the date by which his employer must provide this info to Adam via form P11D
basic charge (annual value) £6,000
Expensive accommodation benefit (£230k + £40k - £75k) * 2.5% = £4,875
Cleaning (12 x £50) £600
Total taxable benefit = £11,475
since his employer bought the house more than 6 years before Adam moved in, cost of the house is replaced by market value as at April 17 when Adam moved in
Cost of improvements in June 17 is included as they were incurred prior to 6 April 18
But extension in May 18 won’t be included until the following year
After end of tax year, Eden Events ltd will include the value of living accommodation benefit on Adam’s P11D
Form must be submitted to HMRC by 6 July following the end of the tax year ad a copy provided to Adam by 6 July also
What is the taxable benefit on the private use of company vans?
£1,240 where van has 0 CO2 emissions
£3,350 for all other vans
Time apportion for part availability
Deduct any amount contributed by employee for the value of the benefit
There is no benefit if the vans used for travel between home and work and any other private use is insignificant
FUEL provided for private use in company vans = £633
Time apportion for part availability
No reduction for employee contribution towards fuel costs
What is the taxable benefit on the fuel provided for private use in company vans?
FUEL provided for private use in company vans = £633
Time apportion for part availability
No reduction for employee contribution towards fuel costs
What is the treatment for assets lent for private use?
A benefit has arisen
Depends on whether the employer owns or rents the asset
If they own: benefit = 20% x market value
If they rent: benefit = higher of annual value or rent paid by e’er
Time apportion for part availability
Deduct any amount contributed by the employee for the value of the benefit
No benefit if private use is insignificant e.g. work laptop for private email
Mobile phones and bikes are exempt
TYU6: Dennis is provided with Diesel car from 6 Oct 18, list price £50k, although employer got discount and paid £48k
CO2 emissions = 178g/km
Dennis uses the car privately and for employment duties
Employers pay all costs (except diesel fuel) totalling £5,100 for 18/19
Calc the tax benefit for 18/19
Relevant % = 20% + 1/5* (175-95) + 4% (for diesel) = 40%
Annual benefit = 37% x £50k = £18.5k
Available for 6 months in tax year 18/19
benefit in 18/19 = £18.5k * 6.12 = £9,250
TYU7. a) Calculate the relevant taxable benefits for the following cars provided to employers in 18/19
CO2 emissions: 48g
List Price: £43,200
Fuel Type: Diesel
CO2 emissions are 48g/km are rounded down to 45g/km
Relevant % = 13% + 4% (for diesel) = 17%
Annual benefit 18/19 is 17% x £43,200 = £7,344
TYU7. a) Calculate the relevant taxable benefits for the following cars provided to employers in 18/19
CO2 emissions: 137g
List Price: £18,700
Fuel Type: Petrol
CO2 emissions are 137g/km are rounded down to 135g/km
Relevant % = 20% + 1/5*(135-95) = 28%
Annual benefit 18/19 is 28% x £18,700 = £5,236
TYU7. a) Calculate the relevant taxable benefits for the following cars provided to employers in 18/19
CO2 emissions: 226g
List Price: £12,890
Fuel Type: Petrol
CO2 emissions are 226g/km are rounded down to 225g/km
Relevant % = 20% + 1/5*(225-95) = 46% restricted to maximum of 37%
Annual benefit 18/19 is 37% x £12,890 = £4,769
TYU7. a) Calculate the relevant taxable benefits for the following cars provided to employers in 18/19
CO2 emissions: 187g
List Price: £8,900
Fuel Type: Diesel (meets RDE2)
CO2 emissions are 187g/km are rounded down to 185g/km
Relevant % = 20% + 1/5*(185-95) = 38% restricted to maximum of 38%
Annual benefit 18/19 is 37% x £8,900 = £3,293
Note: no need for 4% diesel supplement as car meets RDE2
How are payments of PAYE made ?
Employers generally make monthly payments of income tax and NIC to HMRC as follows:
- Income tax and NIC deducted during each tax month is due for payment 14 days after the month ends
- Tax month runs 6th - 5th of each month (payment due 19th)
- Deadline is extended to 22nd for electronic payment
- Employers with 250+ employees must make their PAYE payments electronically
- Employers whose average monthly payments of PAYE and NIC don’t exceed £1,500 total are allowed to make payments quarterly, rather than monthly
TYU8: gwen was provided with car (list price £25k) for 18/19
Employers only paid £23.5k after discount
Diesel engine
CO2 emissions 122g/km
Employer paid £5k for diesel during tea year, 50% was private
Gwen contributed £5,675 towards capital cost of the car, and £40/month for private use and £30/month for private diesel
Calc taxable benefit for the car
Calc taxable benefit for fuel used in the car
CO2 emissions 122g/km rounded down to 120g/km
Appropriate %: (120-95)*1/5 + 20% + 4%(diesel) = 29%
a. Car benefit
List price £25k - £5k max = £20,000
Benefit (20k * 29%) = £5,800
Less employee contribution for use = £40*12 months = £(480)
Taxable benefit = £5,320
Note:price paid by employer for car is irrelevant
b. Fuel benefit
Benefit £23,400 * 29% = £6,786
Less employee contributions (Nil)
Taxable benefit = £6,786
Note: there is no deduction for her contributions towards the full as she has not reimbursed her employer for the cost of all her private fuel
When is security required for HMRC payments, and what is the security?
Required where payment is seriously at risk
E.g. an employer has
- Deliberately not paid PAYE/NIC
- Built up large PAYE/NIC debts
- Not responded to HMRC’s attempts to contact them
- Security is a cash deposit
Can be appealed against, or against the amount required
Failure to provide security is a criminal offence punishable by a fine up to £5k
What is the fine for failing to provide security for payment of PAYE
Up to £5k
What are coding notices used for?
They enable employers to deduct the correct amount of tax from each employee
Takes into account deductions and allowances available to the individual
What are the 2 forms in relation to each employee’s tax codes?
Form P2 is sent to the employee and gives detail of how the PAYE code has been calculated
Form P9(T) is sent to the employer and gives the PAYE code only
Emplpyer’s payroll software spreads an employee’s allowance (as determined by their PAYE code) evenly over the tax year
TYU9: Molly is provided with the following, what is the taxable benefit for the above asset Van First provided 23 May 16 Cost: £15k Contribution by employee: £100/month CO2 emissions 163g/km
Emissions above 0g/km £3,350
Less employee contribution (12 x £100) (£1,200)
taxable benefit = £2,150
TYU9: Molly is provided with the following, what is the taxable benefit for the above asset
Machinery
First provided 5 June 2011
Cost: £1k
Contribution by employee: £15/month
Annual value (20% * £1,000) £200 Less employee contribution (12 * £15) = £(180)
Taxable benefit £20
TYU9: Molly is provided with the following, what is the taxable benefit for the above asset
Computer First provided 30 Sept 16 Cost: £1,750 Contribution by employee: £0/month private use is insignificant
insignificant private use therefore no taxable benefit
TYU9: Molly is provided with the following, what is the taxable benefit for the above asset
TV
First provided 1 June 2018
Cost: £15k
Contribution by employee: £100/month
Annual value = 20% * £900
Available for 10 months of the tax year (£180 * 10/12)
Taxable benefit = £150
What are the 2 forms in relation to each employee’s tax codes?
Form P2 is sent to the employee and gives detail of how the PAYE code has been calculated
Form P9(T) is sent to the employer and gives the PAYE code only
Emplpyer’s payroll software spreads an employee’s allowance (as determined by their PAYE code) evenly over the tax year
How is a PAYE code calculated?
1. All allowance and deductions are as follows: Allowances: - personal allowance Allowable expenses Adjustment for overpaid tax
Deductions:
- Taxable benefits
- Adjustment for underpaid tax
- a. If allowances> deductions
- Take net figure, remove last digit, add letter L
- L = indiv is entitled to basic personal allowance
- If indiv received part of their spouses personal allowance via marriage allowance, letter M is used
- If they have transferred their personal allowance to spouse, letter N
2.b. Take net figure, remove last digit, deduct 1 and add letter K to the start
TYU10: Reshma earns salary of £21k and has benefits of £5,085
She is entitled to basic personal allowance
What is her PAYE code for tax year?
Allowance: personal allowance £11,850 Less deduction (taxable benefit) £5,085
Net allowances = £6,765
Reshma’s code is therefore 767L
How do tax codes show unpaid tax?
Shows unpaid tax in earlier years or income tax on estimated savings income and dividend income
When deducting the adjustment for underpaid tax gross up using the indiviudual’s estimated marginal (i.e. highest) rate tax
There is a limit to the amount of tax that can be ‘coded out’ this way
TYU11: Andy earns £22.5k per year and is entitled to the basic personal allowance
He has unpaid tax of £420 for tax year 17/18 which is to be paid through PAYE system
What is Andy’s tax code for 18/19?
Allowances: personal allowance £11,850
Less: deduction (underpaid tax) £420 x 100/20 £(2,100)
Net allowances £9,750
Any’s tax code is therefore 975L
TYu12: Rebecca earns salary of £18l and has benefits of £13,150. Sh is entitled to basic personal allowance.
What is Rebecca’s PAYE code for tax year 18/19
Allowance: personal allowance £11,850
Less: Deductions (taxable benefit) £(13,150)
Net deductions £(1,300)
Remove last digit (130) and deduct 1
Rebecca’s tax code is therefore K129
