Chapter 3 - Employment Income Flashcards
What is the basis of assessment of employment income? For both employees and directors
I.E. when we deem to have received the earnings:
Most earnings are deemed to be received the earliest of:
- the actual payment date (E/D)
- the date on which the individual became entitled to the payment (E/D)
- the date in which the earnings are credited in the company’s accounts (D)
4a. the last day of the period of account if the earnings are determined before the end of the period (D)
4b. the date on which the earnings are determined if they are determined after the end of the accounting period. (D)
When is an expense an allowable deduction?
An expense is an allowable deduction if:
- The employee is obliged to incur and pay the expense
- The expense is wholly, exclusively and necessarily in the performance of duties of employment
Examples of allowable deductions include:
- Professional subscription fees
- Proportion of expenses required to work from home
- Necessary tools, uniform, protective clothing…
- Employee’s cash contributions into an occupational pension scheme
When is a reimbursed expense exempt from being included as taxable income?
Where an employee is reimbursed expenses by the employer, the amount received is taxable income.
Some expenses are exempt from being included as taxable income, where an employee would be able to claim a tax deduction for the business related expenses under the rules set out above e.g. business travel, professional subscriptions, expenses which fall within the wholly, exclusively and necessarily provisions.
Example Scenario: A marketing manager employed by a company needs to attend a conference related to their field.
Wholly: The conference is directly related to their role in marketing and aims to enhance their professional skills and knowledge.
Exclusively: They are attending the conference solely for business purposes, to represent their company and gain insights relevant to their work.
Necessarily: Attending this specific conference is deemed essential for the employee to stay updated on industry trends and perform their job effectively.
Where an expense is partly allowable and partly disallowable, then the exemption can be applied to the allowable part.
Example: Let’s say you use your mobile phone for both work and personal calls. You can calculate the percentage of your phone bill that relates to business use and claim a deduction for that portion.
When is travel between home and work an allowable expense?
Travel between home and work is not an allowable expense, with some exceptions:
- If the employee has no normal place of work, then travel costs between home and work are allowable. EXAMPLE: delivery driver
- If the employee home is his, her or their normal place of work, travel costs, between home and other work locations are allowable. Example: wfh, but has to travel for work projects.
Explain the three scenarios in respect of client entertainment expense:
3 scenarios:
- Reimbursed Directly - Good for employee
- Exempt income for the employee
- As such, it is not deducted from employee’s income
- The reimbursed amount is a disallowed expense for the employer, as client entertainment is not an allowable expense. - Specific entertaining allowance:
- Included as income for the employee
- Deduct entertaining expenses incurred from employee’s income
- Full allowance is a disallowed expense for the employer - General/Round sum allowance: Good for employer
- Included as income for the employee
- Deduct allowable expenses incurred (other than on entertaining) from employee’s income
- Full allowance is a deductible expense for the employer
Explain the statutory mileage rate scheme and how it applies.
The statutory mileage rate scheme (SMRS) applied to employees or volunteers using their own car/bike/van for business travel and receiving mileage allowance/payments for business travel from employers.
HMRC set statutory rates for ‘reasonable’ amounts that can be deducted from employment income:
- Car/Van: 45p
- Motorcycle: 24p
- Cycle: 20p
If the payment is in excess of the statutory rate, the excess is a taxable benefit.
If the payment is below the statutory rate, the shortfall is an allowable deduction.
Passenger payment: is an amount paid to employees, using a car and carrying one or more fellow employees/volunteers making the same trip.
The passenger payment rate is 5p per passenger mile, the same concept of excess or below the rate applies to passenger payments too.
How do you calculate the Car benefit?
The car benefit is calculated as:
List price * CO2 emissions
However, we deduct any employee made contributions (up to £5000)
What is the taxable benefit for an asset transferred to an employee?
Explain both the cases
- If an employer purchases a new asset and give it to an employee immediately, the employee is taxed on the cost to the employer.
- Where an employee has use of an asset and is then given the asset, the benefit is the higher of:
- Market value when gifted
- Market value when first provided, less benefits already taxed under private use (asset on loan) rules (I.E. 20% of the MV P.A of the asset as long as the asset has been lent to the employee.
- However, if the asset being given is a car, van or bike, then the benefit is always the current MV
- Employee contributions are deductible
Explain the taxable benefit of a job-related accomodation
If the accomodation is job related, then the living accomodation is an exempt benefit.
- Has to be on sight (international space station)
- Customary (working in an embassy or butler)
- Treath to employee’s security (Soldier in barracks)
In addition, for all living expenses, the benefit is limited to 10% of the employer’s net earnings:
Explain the benefit related to employment related loans
There is a taxable benefit on loans made to an employee below the official rate of interest (ORI) of 2.25%.
The benefit is equal to the difference between the ORI and the interest actually paid.
There is no taxable benefit where:
- Total loans to an employee ≤ £10,000 throughout the tax year
- The loan is made on normal commercial terms in the course of a money lending business.
If all or part of a loan to an employee is written off, the amount written off is treated as a benefit and charged to income tax (and class 1 NICs) in full at the time of the write-off.
Explain the tax implications with optional remuneration arrangements:
This is also known as salary sacrifice, schemes through which an employee gives up the right to an amount of earnings in return for a benefit. This includes benefit with a cash allowance option and flexible benefits packages with a cash option
Where a benefit is chosen instead of some form of cash pay, the taxable value is the higher of:
- the amount of cash pay given up
- the taxable value under the normal benefit rules
The taxable amount is treated as a benefit (usually reported via P11D) and subject to class 1A national insurance contributions.
The optional remuneration rules must be applied even if the benefits would normally be exempt, but the following benefits are excluded from the rules and treated as normal, even if received as part of an optional remuneration arrangement:
Benefits in relation to employment overseas
The following are exempt benefits if provided to an employee who is employed abroad:
- The cost of board and lodging abroad
- Travel home (any number of return visits)
- For absences of 60 days or more, travelling expenses for a spouse and minor children (up to two return visits per person per tax year)
- overseas medical treatment and insurance when working abroad
