Employment Income Flashcards
What is the employment income working??
Salary X
Bonus X
Taxable Benefits X
= Employment Income
How is employment income taxed?
Employment income is taxed on a receipts basis:
Salary: Tax the gross amount received on every pay day in the tax year
Bonus: Deemed to be received on the earlier of:
- the payment date
- the date when the individual becomes entitled to payment
Taxable benefits: later cards. If the benefit has only been provided for only part of the tax year time apportion to the nearest month
What happens if an employer provides a benefit where there is no specific rule for calculating the benefit?
If an employer provides a benefit, where there is no specific rule for calculating the benefit, the employee is taxed on the marginal cost to the employer, less any contributions made by the employee
How do you tax non-cash vouchers?
A voucher or card exchangeable for goods or services (e.g. a book token)
Cost to the employer, less any amount paid by the employee
How do you tax cash vouchers?
A voucher or card exchangeable for cash
Amount for which the voucher can be exchanged
How do you tax a credit token?
Usually a credit card, which can be used to obtain money, goods or services
Cost to the employer, less any amount paid by the employee
What are trivial benefits?
These are exempt (although there is an annual cap of £300 in respect of such benefits when provided to certain directors)
Trivial benefits must meet all the following:
- the cost of providing the benefit does not exceed £50
- it is not cash or a cash voucher
- it is not provided in recognition of services
Otherwise it is taxed normally
Is living accomodation taxable?
The provision of living accomodation is not taxable if it is job-related, meaning:
- necessary for performance of duties e.g., caretaker
- customary to be provided, e.g. police officers
- provided for security, e.g soldier barracks
How does a director qualify for necessary or customary job-related accommodation?
They must:
- own no more than 5% shares in company
- be a full time working director (unless the company is charity/non-profit making)
What happens when the living accommodation provided by the employer is not job related but the employer rents the property?
if the employer rents the property, the benefit is the higher of:
- the annual or rateable value (given in the question), and
- the rent paid by employer
The benefit should be time apportioned for part availability and any rent paid by the employee is deducted from the value of the benefit
What happens when the living accommodation provided by the employer is not job related but the employer owns the property?
The basic benefit is the rateable value (given in the question)
If the cost of the house exceeds £75,000 the additional benefit is calculated as:
(‘Cost’ - £75,000) x official rate of interest at start of tax year
- Cost is generally the original value when the employer purchased the property
- If the employer owned the property for more than six 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
What is the official rate of interest from 6 April 2020?
2.25%
What other benefits does accomodation incur?
There is further benefit for related living expenses paid for by the employer, such as:
- heating and lighting
- cleaning
- repairs
- decoration
How do you calculate a single car benefit?
A separate tax benefit is taxable if the employer provides private fuel for the car
Car benefit = manufacturer’s list price x CO2 emissions
If the employee makes a contribution towards the private use of the car, this is deducted from the taxable benefit
There is no car benefit for genuine pool cars
How do you calculate manufacturer’s list price?
- Include optional extras
- Deduct any capital contribution made by the employee ( up to a maximum of £5,000)
How do you tax petrol cars first registered from 6.4.20?
The relevant percentage of CO2 emissions from the tax tables are reduced by 2%
How do you tax diesel cars?
For diesel cars, add a 4% supplement to the relevant petrol percentage cars unless they meet the Real Driving Emissions Step 2 (RDE2)
If the employee makes good the whole cost of private fuel what happens?
There is no deduction for employee contributions towards part of the cost of the fuel but if the employee makes good the whole cost of private fuel there is no benefit
How do you deal with the van scale charge?
Given in tax tables.
Time apportion for part availability.
Deduct any amount contributed by the employee from the value of the benefit
There is no benefit if the van is used for travel between home and work and any other private use is insignificant
The taxable benefit on fuel provided for private use in company vans is £666 (given).
Time apportion for part availability
There is no reduction for employee contribution towards fuel costs
Asset lent for private use where the employer owns the asset
Benefit = annual value: 20% x market value when first provided for private use
Asset lent for private use where the employer rents the asset
Benefit = higher of:
- annual value
- rent paid by employer
How must you treat assets lent for private use?
Time apportion for part availability
Deduct any amount contributed by the employee from the value of the benefit
There is no benefit if private use is not significant (e.g. using a work laptop for private email)
Mobile phones and bicycles are exempt
What does a P60 include?
At the end of the tax year and includes:
- gross pay
- tax deducted
- NICs paid by both employee and employer
What is a P11D?
A list of the benefits provided to each employee during the tax year
A full P11D is not required for the benefits that are payrolled, but the employer must submit a p11D(b) showing the cash equivalents of these benefits
What is a P45?
Form P45 is a four part form used when an employee leaves. It contains a summary of taxable pay, tax and NIC deducted as well as employer’s NI contributions for the employee, up to the date of leaving
When is income tax and NIC deducted during each tax month due for payment from employers to HMRC?
Income tax and NIC deducted during each tax month is due for payment 14 days after the month ends
The tax month runs from 6th to 5th of each month, therefore the payment due date is the 19th of each month
How do HMRC take electronic payments of NIC and income tax?
The deadline to pay income tax and NIC due is extended to 22nd of the month for electronic payment
Employers with at least 250 employees must make their monthly PAYE payments electronically
When do smaller employers pay PAYE and NIC?
Employers whose average monthly payments of PAYE and NICs are no more than £1,500 in total are allowed to make payments quarterly, rather than monthly
When do HMRC require security for payment of PAYE?
HMRC can require security (e.g cash deposit) where payment is seriously at risk, i.e., an employer has:
- deliberately not paid PAYE/NIC; or
- built up large PAYE/NIC debts; or
- not responded to HMRC’s attempts to contact them
An employer can appeal against the requirement to provide or the amount required
What happens if an employer fails to provide security for payments of PAYE?
Failure to provide security is a criminal offence punishable by a fine of up to £5,000
When can late penalties be suspended?
Late penalties can be suspended if the taxpayer agrees a time to pay arrangement, unless this arrangement is then abused
What forms does HMRC issue in relation to each employee’s tax code?
- 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
The employer’s payroll software spreads an employee’s allowances (as determined by their PAYE code) evenly over the tax year
What are the allowances in Step 1 of calculating the PAYE code?
Allowances:
Personal allowance X
Transfer of PA from spouse X
Adjustment for overpaid tax X
What are the deductions in Step 1 of calculating the PAYE code?
Deductions:
Taxable Benefits X
Transfer of PA to spouse X
Adjustment for underpaid tax X
If allowances exceed deductions in PAYE calculation, what happens?
Allowances > Deductions
Take net figure - remove last digit - add letter L
L means the individual is entitled to basic personal allowance
If they received some of their spouse’s allowance: M
If they transferred to their spouse: N
The PAYE letter codes are provided in the exam
If deductions exceed allowances in PAYE calculation, what happens?
Deductions > Allowances
Take the net figure - remove last digit - deduct 1 - add letter K at start (provided)
What is a coding notice?
The coding notice can be used to show unpaid tax in earlier years, or income tax on the taxpayer’s estimated savings income and dividend income in the current year
Tax of up to £3000 can be collected this way
What do you do when deducting the adjustment for underpaid tax?
When deducting the adjustment for underpaid tax gross up using the individual’s estimated marginal (i.e. highest) rate of tax
basic: x 100/80
