Chapter 4 - Employment income

Question 1

Define employment income

Answer 1

Employment income includes income arising from an employment and the income of an office holder such as a director.

Question 2

What are the two types of employment income?

Answer 2

There are two types of employment income:

1. General earnings
2. Specific employment income (not in your syllabus)

Question 3

Define general earnings.

Answer 3

Any salary, wages or fee, any gratuity or other profit or incidental benefit of any kind obtained by an employee consisting of money or money’s worth, and anything else constituting an emolument of the employment, together with anything treated under any statutory provision as earnings (eg, benefits).

Question 4

What is the basis for assessment for general earnings?

Answer 4

The basis of assessment of general earnings is the receipts basis - the actual amount received in the tax year.

This will be the earlier of:
1. the time when payment is made
2. the time when a person becomes entitled to payment (common with bonuses were there is a delay between bonuses announced and being paid)

Question 5

When do benefits become taxable?

Answer 5

General earnings not in the form of money (ie, benefits) are taxable when they are received by the employee.

Question 6

What is meant by the benefits code?

Answer 6

Taxable benefits are set down in legislation called the benefits code.

Question 7

Give seven examples of taxable benefits.

Answer 7

Vouchers

Living accommodation

Expenses connected with the provision of living accommodation

Cars and fuel provided for private use

Vans provided for private use

Assets made available for private use

Any other non-monetary benefit provided by reason of the employment

Question 8

How can taxable benefits be reduced to nil?

Answer 8

Taxable benefits can be reduced to nil if the employee pays the full monetary value of the benefit to the employer on or before 6 July following the tax year.

Question 9

What two adjustments to taxable benefits in relation to period and repayment are useful to remember?

Answer 9

Taxable benefits should :
* be time apportioned (on a monthly basis for the purpose of the exam) if not available for full year
* have contributions made by the employee deducted from

Question 10

What are the three types of vouchers that count as taxable benefits to employees?

Answer 10

• Cash vouchers (vouchers exchangeable for cash)
• Credit tokens (e.g. a credit card) used to obtain money, goods or services
• Vouchers exchangeable for goods and services (e.g. book tokens)

Question 11

What is the value of the taxable benefit for cash vouchers (vouchers exchangeable for cash)?

Answer 11

The taxable amount is the sum of money for which the voucher is capable of being exchanged

Question 12

What is the value of the taxable benefit for credit tokens (e.g. a credit card) used to obtain money, goods or services?

Answer 12

The taxable amount is the cost to the employer of providing the benefit, less any amount paid by the employee

Question 13

What is the value of the taxable benefit for vouchers exchangeable for goods and services (e.g. book tokens)

Answer 13

The taxable amount is the cost to the employer of providing the benefit, less any amount paid by the employee

Question 14

What are the two scenarios for living accomodation provided to employees regarding relationship to job? What are the taxable benefit implications in each scenario?

Answer 14

• Living accomodation which is not job related therefore a taxable benefit
• Living accomodation which is job related therefore not a taxable benefit

Question 15

Define job related accommodation.

Answer 15

Accommodation is job related if:

(a) the accommodation is necessary for the proper performance of the employee’s duties (eg, caretaker); or
(b) the accommodation is provided for the better performance of the employee’s duties and the employment is of a kind in which it is customary for accommodation to be provided (eg, police officers); or
(c) the accommodation is provided as part of arrangements in force because of a special threat to the employee’s security (eg, members of the government).

A director can only claim one of the first two exemptions if they own 5% or less of the shares in the employer company and either they are a full-time working director or the company is non-profit making or is a charity.

Question 16

What are the two scenarios for non-job related living accomodations?

Answer 16

• The living accomodation provided to the employee is rented by the employer
• The living accomodation provided to the employee is owned by the employer

Question 17

What is the treatment when the non-job related living accommodation is rented by the employer?

Answer 17

If the living accommodation is rented by the employer, the amount of the benefit is the higher of the annual value (given in question) and the rent actually paid by the employer.

Question 18

What is the taxable benefit treatment when the non-job related living accommodation is owned by the employer?

Answer 18

If the living accommodation is owned by the employer, the amount of the benefit is the rent that would have been paid if it had been let at its annual value (taken to be the rateable value).

Question 19

What is important to note if the non-job related living accomodation owned by the employer cost more than £75,000 (expensive accomodation)?

Answer 19

There is an additional yearly benefit

Question 20

With regards to expensive accommodation, how is the additional benefit calculated?

Answer 20

The amount of the additional benefit is calculated as:

(Cost - £75,000) x the official rate of interest at the start of the tax year

Where Cost = Original cost + improvements made before the start of the tax year in which the benefit is charged.

Question 21

What happens when a property is acquired by an employer more than 6 years ago?

Answer 21

If the property was acquired by the employer more than six years before it is first provided to the employee, use the market value of the property when it was first provided plus the cost of subsequent improvements to calculate the additional charge, instead of the original cost plus improvements.

However, unless the original cost plus improvements exceeds £75,000, the additional charge cannot be imposed, however high the market value.

Question 22

What is the treatment for expenses connected with the provision of living expenses?

Answer 22

In addition to the living accommodation benefits described above, employees are also taxed on related expenses paid by the employer such as:

• Heat and lighting
• Council tax and water
• Cleaning, repairs, maintenance and decoration

The taxable benefit in each case is the cost to employer less any employee contribution.

Question 23

What happens when an employee is also provided with furnished living accommodation?

Answer 23

Where an employee is provided with furnished living accommodation, the employee will also have a taxable benefit for the private use of the furniture provided by their employer

Question 24

What is the basis for the taxable benefit for cars provided to employees for private use?

Answer 24

% x List Price = Taxable Benefit
Where the % is dependent on the cars CO2 emissions

Question 25

Outline the percentages used in calculating the taxable benefit for cars provided to employees for private use

Answer 25

(see tax table)

Question 26

What happens when a car uses diesel instead of petrol?

Answer 26

Where the car uses diesel instead of petrol, the percentage is increased by a 4% supplement, subject to the overall maximum of 37%.

Question 27

Which cars are exempt from the diesel supplement?

Answer 27

However, cars that meet the Real Driving Emissions Step 2 (RDE2, also known as Euro 6d) standard are exempt from the diesel supplement.

Question 28

What is considered in the list price of the car when calculating the taxable benefit for cars provided to employees for private use

Answer 28

The list price is the price advertised for the car ignoring any discounts received. It also includes accessories bought with the car or added at a later date costing > £100 (accesories added after which cost < £100 can be ignored)

Question 29

Is there a separate charge for the provision of fuel by the employer for private use?

Answer 29

Yes.

There is a separate charge for the provision by the employer of fuel for private use for a car provided by the employer with private use.

Question 30

What is the basis for the taxable benefit for fuel provided to employees for private use?

Answer 30

% x £27,800 = Taxable Benefit
Where the % is dependent on the cars CO2 emissions

The benefit uses the same percentage calculated for the car benefit.

(see tax table)

Question 31

What is the odd thing to remember about fuel benefits regarding contributions by the employee?

Answer 31

Unlike other benefits there is no reduction in the benefit if the employee makes a partial contribution to the cost of private fuel.

There is a full fuel benefit unless the employee reimburses the employer for all private fuel provided.

Question 32

Is there a reduction in the benefit if the employee makes partial contributions to the fuel for private use?

Answer 32

There is no reduction in the benefit if the employee makes a partial contribution to the cost of private fuel.

There is a full fuel benefit unless the employee reimburses the employer for all private fuel provided.

Question 33

What are the benefits regarding vans for private use?

Answer 33

The benefit is an annual amount of £3,960.

The taxable benefit on the provision of a van for private use where the van has zero CO2 emissions is £0 for 2023/24.

(see tax table)

Question 34

What are the benefits regarding fuel for vans for private use?

Answer 34

There is a separate charge for the provision by the employer of fuel for private use of the van.

The benefit is an annual amount of £757.

(see tax table)

Question 35

Regarding assets available for private use, what is the amount of taxable benefits?

Answer 35

The amount of the taxable benefit is the higher of the annual value of the asset or any rent or hire charge payable by the employer.

In both cases, any expenses relating to the provision of the asset are also added to the taxable benefit.

Question 36

What is the annual value of assets provided for private use?

Answer 36

The annual value is 20% of the market value of the asset when first provided for private use to any employee.

Question 37

Which asset for private use is an exception in that it is not a taxable benefit?

Answer 37

1 mobile phone is allowed to be provided to each employee without it being a taxable benefit

Question 38

What must be considered for asset for private use when calculating taxable benefits regarding the amount of time used privately?

Answer 38

No taxable benefit arises if the private use is not significant (for example using a computer (provided for work during the daytime) during the evening). If there is significant private use, calculate the benefit in full then apportion for non-business use.

Question 39

What is the treatment regarding other benefits?

Answer 39

If an employee (or member of the employee’s family or household) receives any other non-monetary benefit by reason of employment and there is no specific provision covering this type of benefit in the benefits code, the taxable benefit is the cost to the employer of
providing the benefit less any amount paid by the employee for the benefit.

Where benefits are provided in-house, the cost of the benefit is the marginal cost.

Question 40

What are some examples of exempt benefits?

Answer 40

Contributions by an employer to a registered pension scheme

A trivial benefit ie, a benefit costing less than £50 to provide, which is not cash or a cash voucher, and which is provided for a non-work reason eg, a birthday or social event. There is an annual cap of £300 in respect of such benefits when provided to certain directors.

Pension advice and associated tax planning available to all employees up to £500 per tax year (above which the full amount is taxable)

One mobile telephone (including smartphones) available for private use by an employee, including all calls

Free or subsidised meals in a canteen where such meals are available to all staff

Social events paid for by the employer up to £150 per head per tax year

Entertainment provided by a third party (eg, seats at sporting/cultural events)

Non-cash gifts from third parties up to £250 per tax year from the same donor

Provision of a parking space at or near the employee’s place of work

Awards of up to £5,000 made under a staff suggestion scheme

Work-related training courses

Sports and recreation facilities available to employees generally but not to the general public

Childcare facilities run by or on behalf of an employer

Payments towards the additional costs of an employee working from home (up to £4 per week without supporting evidence, payments in excess of £4 per week require documentary evidence that the payment is wholly in respect of such additional costs)

Personal incidental expenses (eg, cost of telephone calls home) while the employee is required to stay away overnight on business up to £5 per night in the UK, £10 per night abroad. If reimbursement by the employer exceeds these daily limits the total amount
reimbursed is taxable.

Works buses and subsidies for employees to use public bus services

Travel expenses when public transport disrupted, late night journeys and where car sharing arrangements break down

Use of bicycles or cyclists safety equipment if made available to all employees

Reasonable removal expenses (maximum £8,000) paid for by an employer for a new employment position or on relocation

Non-cash long service awards in respect of at least 20 years service, not exceeding £50 per year of service

Eye tests required under health and safety legislation and specially prescribed glasses provided for employees who use VDU equipment

Health-screening assessment or medical check up provided for an employee, by the employer (maximum of one of each per tax year)

Up to £500 pa for recommended medical treatment to assist with a return to work

Vehicle battery charging facilities at or near the place of work where the vehicle is used by the employee and the vehicle is not a taxable car or van

Question 41

What is the aim of the PAYE system?

Answer 41

The aim of the PAYE system is to ensure that the correct amounts of income tax and national insurance contributions are paid on cash payments to employees.

Question 42

When should Income tax and national insurance contributions deducted under the PAYE system be paid?

Answer 42

Income tax and national insurance contributions deducted under the PAYE system must usually be paid to HMRC 17 days after the end of the ‘tax month’ to which they relate. The tax month runs from the 6th day of one month to the following 5th day of the next month. Therefore, payment is required by the 22nd of each calendar month.

Question 43

When can PAYE payments be made quarterly instead of monthly?

Answer 43

Payments can be made quarterly instead of monthly where the average monthly total of the PAYE income tax and national insurance contributions does not exceed £1,500.

Question 44

Outline the method for determining PAYE codes

Answer 44

1) Set out the following pro forma and fill in the respective figures - for tax underpaid you must gross up the amount which will be dependnet on the tax rate they are in (gross up by: 100/20 for 20%, 100/40 for 40%, 100/45 for 45%)
2) If A-B is positive, take off the last digit then add one of the letters following letters at the end; L if entitled to basic personal allowance (£12,570), N if electing to donate personal allowance to spouse (£11,310), M if receiving personal allowance from spouse (£13,830)
3) If A-B is negative, take off the last digit, subtract 1 then put the letter K at the beginning

Question 45

Can the code number in a tax code reflect unpaid tax from income from previous years?

Answer 45

Yes.

The code number can also reflect unpaid tax on income from earlier years. In this case, gross up
the unpaid tax using the taxpayer’s estimated marginal rate of income tax (for example, multiply by 100/20 for a basic rate taxpayer) and deduct the grossed up unpaid tax from total allowances.