Chapter 3 - Employment income

Question 1

Q: What is considered employment income for tax purposes?

Answer 1

A: Employment income includes salary, tips, bonuses, and taxable benefits, all taxed on a receipts basis (when the income is received).

Question 2

Q: How is salary taxed for employment income?

Answer 2

A: Salary is taxed on the gross amount received during the tax year.

Question 3

Q: How are tips taxed for employment income?

Answer 3

A: Tips, such as service charges, are taxable when received by the employee.

Question 4

Q: When is a bonus taxed for employment income?

Answer 4

A: A bonus is taxed when either it is paid or when the employee becomes entitled to receive it.

Question 5

Q: How are taxable benefits calculated for employment income?

Answer 5

A: Taxable benefits are calculated based on the employer’s annual cost, apportioned if provided for part of the year.

Question 6

Q: How is the taxable amount for a benefit determined if no specific rule exists?

Answer 6

A: The taxable amount is the marginal cost to the employer minus any contribution from the employee.

Question 7

Q: How are non-cash vouchers taxed for employment income?

Answer 7

A: Non-cash vouchers are taxed based on the employer’s cost minus any contribution by the employee.

Question 8

Q: How are cash vouchers taxed for employment income?

Answer 8

A: Cash vouchers are taxed at the amount for which they can be exchanged.

Question 9

Q: How are credit tokens taxed for employment income?

Answer 9

A: Credit tokens are taxed similarly to non-cash vouchers, based on the employer’s cost minus any employee contribution.

Question 10

Q: What are the conditions for a benefit to be considered trivial and exempt from tax?

Answer 10

A: The cost must not exceed £50, it cannot be cash or a cash voucher, and it must not be provided in recognition of services.

Question 11

Q: Name some examples of exempt benefits provided by employers.

Answer 11

A: Free/subsidized canteen, sports facilities, workplace childcare, health screenings, and employer pension contributions.

Question 12

Q: What is the tax exemption for staff social events?

Answer 12

A: Social events are exempt up to £150 per employee per year. Events over £150 are taxable, not just the excess.

Question 13

Q: What is the tax treatment of non-cash, long service awards?

Answer 13

A: Non-cash long service awards are exempt up to £50 per year of service, for service over 20 years.

Question 14

Q: When is job-related accommodation exempt from tax?

Answer 14

A: Accommodation is exempt if necessary for the job, customary for the role, or provided for security reasons.

Question 15

Q: What conditions must be met for a director to qualify for job-related accommodation exemption?

Answer 15

A: The director must own no more than 5% of the company and be a full-time working director (unless it’s a charity/non-profit).

Question 16

Q: How is the taxable benefit calculated for living accommodation rented by the employer?

Answer 16

A: The taxable benefit is the higher of:

• The annual or rateable value.
• The rent paid by the employer.
• Time-apportion if the accommodation is available for part of the
  year, and subtract any rent paid by the employee.

Question 17

Q: How is the taxable benefit calculated for living accommodation owned by the employer?

Answer 17

A: The basic benefit is the rateable value.

• If the original cost of the property exceeds £75,000, an additional
  benefit is calculated as: (‘Cost’ – £75,000) × official rate of interest.
• Time-apportion if available for part of the year, and subtract
  employee contributions.

Question 18

Q: How is the taxable benefit for living expenses (e.g., heating, cleaning) in accommodation calculated?

Answer 18

A: The benefit is calculated based on the cost to the employer minus any contribution made by the employee.

Question 19

Q: How is the taxable car benefit calculated?

Answer 19

A: The car benefit is:

• Manufacturer’s list price × CO2 emissions percentage.
• If the employee contributes to the cost, this amount is deducted
  from the benefit.
• No car benefit for incidental private use of genuine pool cars.

Question 20

Q: How do you calculate the CO2 emissions percentage for cars?

Answer 20

A:

• Petrol cars: Percentage based on CO2 emissions, with +1% for each
  complete 5g/km over 75g/km.
• Diesel cars: Add 4% to the petrol car percentage unless RDE2
  standard is met.
• Hybrid cars: Based on the electric battery range, with percentages
  ranging from 2% to 14%.

Question 21

Q: How is the private fuel benefit calculated?

Answer 21

A: The private fuel benefit is:

• £27,800 × CO2 emissions percentage (same as for the car).
• Time-apportion if not available for the full year.
• No deduction for employee contributions, but no benefit if the
  employee pays the full fuel cost.

Question 22

Q: What is the taxable benefit for a van scale charge?

Answer 22

A: The van scale charge is £3,960 for private use of an employer’s van, with no benefit for zero CO2 emissions vans.

• Time-apportion for part availability.
• Deduct any employee contribution towards the benefit.

Question 23

Q: What is the taxable benefit for private fuel provided in company vans?

Answer 23

A: The taxable benefit for fuel provided in company vans is £757, time-apportioned for part-year availability, with no reduction for employee contributions.

Question 24

Q: How is the taxable benefit calculated for assets lent for private use (other than cars/vans)?

Answer 24

A:

• If the employer owns the asset: The benefit is 20% of the asset’s
  market value when first provided for private use.
• If the employer rents the asset: The benefit is the higher of the
  annual value or the rent paid by the employer.
• Time-apportion for part availability, and deduct any employee
  contribution.

Question 25

Q: Are there any exemptions for assets lent for private use?

Answer 25

A: Yes, there is no taxable benefit for:

• Using work equipment (e.g., laptop) for insignificant personal use.
• Mobile phones and bicycles provided by the employer are exempt
  from taxable benefit.

Question 26

Q: How should you handle time apportionment when calculating taxable benefits?

Answer 26

A: Time apportionment should be applied when the benefit is only available for part of the year (e.g., if an asset or accommodation is provided part-time). The benefit is adjusted based on the number of months or days it is available.

Question 27

Q: How is the taxable benefit for a zero-emission car calculated?

Answer 27

A: The CO2 emissions percentage for zero-emissions cars is 2%, and this percentage is used to calculate the taxable car benefit.

Question 28

Q: What is the treatment of a hybrid car for tax purposes?

Answer 28

A: The CO2 emissions percentage for a hybrid car depends on the car’s electric battery range, with percentages ranging from 2% for battery ranges over 130 miles, to 14% for ranges under 30 miles.

Question 29

Q: What happens if an employee makes good the entire cost of private fuel for a company car?

Answer 29

A: If the employee reimburses the full cost of private fuel, no taxable benefit arises for private fuel.

Question 30

Q: Are there any exemptions for benefits related to employee social events?

Answer 30

A: Yes, benefits for employee social events are exempt if the total cost does not exceed £150 per head. If the total cost exceeds £150, the entire amount is taxable, not just the excess.

Question 31

Q: What is Real Time Information (RTI) in the context of PAYE?

Answer 31

A: Employers must report PAYE information to HMRC in real time, submitting details of pay and deductions using payroll software through Full Payment Submission (FPS) on or before the day employees are paid.

Question 32

Q: What is Employer Payment Summary (EPS) used for?

Answer 32

A: EPS is used when an employer reclaims statutory payments (e.g., maternity, paternity, adoption) or the employment allowance.

Question 33

Q: What types of benefits can employers voluntarily payroll under the voluntary payrolling system?

Answer 33

A: Employers can payroll benefits such as company cars and medical insurance but not living accommodation.

Question 34

Q: What is form P60 and when must it be provided?

Answer 34

A: Form P60 summarises gross pay, tax deducted, and NICs paid. Employers must provide it to employees by 31 May after the end of the tax year.

Question 35

Q: What is form P11D and its deadline for submission?

Answer 35

A: Form P11D reports taxable benefits provided to employees during the tax year. It must be submitted to HMRC by 6 July and given to employees by that date.

Question 36

Q: What is the difference between a full P11D and P11D(b)?

Answer 36

A: A full P11D is required for non-payrolled benefits. P11D(b) is used to report the cash equivalents of payrolled benefits.

Question 37

Q: What is form P45 used for?

Answer 37

A: Form P45 is used when an employee leaves. It summarizes taxable pay, tax, and NIC deducted up to the leaving date. The leaving date is reported in the FPS.

Question 38

Q: When are PAYE payments to HMRC generally due?

Answer 38

A: PAYE payments are due 14 days after the end of the month (19th of the month), extended to the 22nd for electronic payments.

Question 39

Q: Who is required to make electronic PAYE payments?

Answer 39

A: Employers with at least 250 employees must make electronic PAYE payments.

Question 40

Q: When can employers make quarterly PAYE payments?

Answer 40

A: Employers whose total monthly PAYE and NIC payments are less than £1,500 can make quarterly payments.

Question 41

Q: What are the penalties for errors in FPS submissions under Real Time Information (RTI)?

Answer 41

A: The same penalty regime for errors in tax returns applies to errors in FPS submissions.

Question 42

Q: When is a late payment penalty applied for PAYE and NIC?

Answer 42

A: Late payment penalties apply if PAYE/NIC is due during the tax year and the payment is made late. The first late payment within 6 months has no penalty.

Question 43

Q: Can late payment penalties be suspended?

Answer 43

A: Yes, if the taxpayer agrees to a time-to-pay arrangement, but it can be revoked if misused.

Question 44

Q: What is the purpose of a coding notice?

Answer 44

A: A coding notice tells the employer the correct tax code to use so that the right amount of tax is deducted from an employee’s salary.

Question 45

Q: What is form P2 and form P9(T)?

Answer 45

A: P2 is sent to the employee detailing the tax code calculation. P9(T) is sent to the employer with the employee’s tax code.

Question 46

Q: How do you calculate a PAYE code if allowances exceed deductions?

Answer 46

A: Calculate Net of allowances and deductions, subtract the last digit from the net figure and add letter L to the code.

Question 47

Q: What does the letter M or N in a PAYE code signify?

Answer 47

M means the employee receives part of their spouse’s personal allowance (marriage allowance). N means the employee transferred part of their personal allowance to their spouse.

Question 48

Q: How do you calculate a PAYE code if deductions exceed allowances?

Answer 48

A: Subtract the last digit, subtract 1, and add K at the start of the code.

Question 49

Q: What does underpaid tax mean in a PAYE code?

Answer 49

A: Underpaid tax can be collected through the PAYE code, with a maximum of £3,000, and is deducted at the highest rate of tax.

Question 50

Q: How is the taxable benefit for living accommodation rented by the employer calculated?

Example:

• The annual value of the accommodation is £10,000.
• The rent paid by the employer is £8,000.
• The accommodation is provided for 9 months of the year, and the
  employee pays £1,000 in rent.

Answer 50

A: £6,500

• The higher of £10,000 (annual value) or £8,000 (rent paid by
  employer) = £10,000.
• Time-apportion for 9 months: (£10,000 / 12) × 9 = £7,500.
• Subtract rent paid by the employee: £7,500 – £1,000 = £6,500
  taxable benefit.

Question 51

Q: How is the taxable benefit for living accommodation owned by the employer calculated?

Example:

• Rateable value of the accommodation is £6,000.
• The original cost of the property was £100,000.
• The official rate of interest is 2.25%.
• The accommodation is available for the full year, and the employee
  does not contribute any rent.

Answer 51

A: £6,562.50

• Basic benefit = £6,000 (rateable value).
• Additional benefit: (£100,000 – £75,000) × 2.25% = £25,000 × 2.25%
  = £562.50.
• Total taxable benefit = £6,000 + £562.50 = £6,562.50

Question 52

Q: How is the taxable benefit for living expenses (e.g., heating, cleaning) in accommodation calculated?

Example:

• The employer spends £1,200 on heating, lighting, and cleaning for
  the accommodation.
• The employee contributes £200 toward the costs.

Answer 52

A: £1,000

• Total cost to the employer = £1,200.
• Subtract the employee’s contribution: £1,200 – £200 = £1,000
  taxable benefit.

Question 53

Q: How is the taxable car benefit calculated?

Example:

• The manufacturer’s list price of the car is £30,000.
• The CO2 emissions percentage is 20%.
• The employee contributes £5,000 towards the cost of private use.

Answer 53

A: £1,000

• Car benefit = £30,000 × 20% = £6,000.
• Subtract the employee’s contribution: £6,000 – £5,000 = £1,000
  taxable benefit.

Question 54

Q: How do you calculate the CO2 emissions percentage for cars?

Example:

• A petrol car has CO2 emissions of 82 g/km.
• The emissions are over 75 g/km, so we add 1% for each complete
  5g/km above 75g/km.

Answer 54

A: 21%

• Emissions above 75g/km = 82g/km – 75g/km = 7g/km.
• Round down to the nearest 5g/km = 75g/km.
• Add 1% for each complete 5g/km above 75g/km: 1% × 1 = 1%.
• CO2 emissions percentage = 20% (for 75g/km) + 1% = 21%.

Question 55

Q: How is the private fuel benefit calculated?

Example:

• The CO2 emissions percentage for the car is 20%.
• The private fuel benefit rate is £27,800.
• The car was available for 6 months of the year.

Answer 55

A: £2,780

• Private fuel benefit = £27,800 × 20% = £5,560.
  *Time-apportion for 6 months: (£5,560 / 12) × 6 = £2,780 taxable
  benefit.
• No deduction for employee contributions.

Question 56

Q: What is the taxable benefit for a van scale charge?

Example:

• The van is used privately for the full year.
• The van has CO2 emissions, so the scale charge applies at £3,960.
• The employee contributes £500 towards the benefit.

Answer 56

A: £3,460

• Van scale charge = £3,960.
• No adjustment for CO2 emissions as the van is not zero emissions.
• Subtract the employee’s contribution: £3,960 – £500 = £3,460
  taxable benefit.

Question 57

Q: What is the taxable benefit for private fuel provided in company vans?

Example:

• The company van is used privately for 8 months of the year.
• The taxable benefit for fuel provided is £757.
• The employee makes no contribution towards the fuel costs.

Answer 57

A: £505.33

• Fuel benefit = £757.
• Time-apportion for 8 months: (£757 / 12) × 8 = £505.33 taxable benefit.

Question 58

Q: How is the taxable benefit calculated for assets lent for private use (other than cars/vans)?

Example:

• The employer lends the employee a piece of furniture with a
  market value of £2,000.
• The employer owns the furniture.

Answer 58

A: £200

• Benefit = 20% × £2,000 = £400 taxable benefit.
• If the furniture was lent for 6 months: (£400 / 12) × 6 = £200 taxable
  benefit.