Chapter 16 – Introduction to Employment Income and benefits Flashcards
Taxable benefits and the cash equivalent
Employees are charged to income tax on their net taxable earnings, which is earnings less any deductions allowed from those earnings under the expenses provisions. Employees are generally taxed on their earnings at the date of receipt. For cash payments this is the date the payment is physically made or the date the employee becomes legally entitled to the payment. For directors the date of receipt is the earliest of the date the payment is made, the date the director becomes legally entitled to the payment or the earlier of:
• The fate when sums on account of his earnings are credited in the company accounts, or
• At the end of the company accounting period if the earnings have been determined by the end of that period,
• At the date the earnings are determined if that date falls after the end of the company’s accounting period.
Taxable benefits – these include company cars, provided accommodation, interest free loans, mobile phones, private medical insurance or a pension scheme. Some benefits are exempt from tax, but the majority are taxable at the hands of the employee. An employee will pay tax on a benefit it that benefit is provided to him or a member of his family or household.
The cash equivalent – the taxable amount of a benefit is the cash equivalent. This is defined as the cost of the benefit less any part of the cost made by the employee. The cost of the benefit is the cost to the employer.
disclosing benefits, pension and social security income
Disclosing benefits – an employer can register with HMRC to report and tax benefits via the payroll. When a benefit has not been included it must be reported to HMRC by the employer on Form 11D. The employer must provide the employees with details of the pay rolled benefits by 31 May following the end of the tax year.
Pension income and social security income – income from pensions is usually taxable. Many social security benefits are exempt from tax, such as child benefit (is taxable where the recipient has adjusted net income in excess of £50,000), council tax benefit, housing benefit, disability living allowances, universal credit, working tax credits and child tax credits. Some social security benefits are taxable, such as jobseekers allowance, bereavement allowance, carer’s allowance, employment and support allowance and incapacity benefit.
