Employment income

Question 1

Self employed tax advantages

Answer 1

• wider range of expenses allowed against income
• income tax is paid much later than employees

Question 2

describe the contracts for the employed and self-employed

Answer 2

Employed - A contract of service
Self-employed - A contract for services

Question 3

Criteria to distinguish between employed and self employed

Answer 3

• control
• remuneration and financial risk
• equipment
• work performance and correction
• holidays and sickness
• exclusivity

Question 4

Personal service companies

Answer 4

• hire their services in the name of the company
• Anti avoidance legislation to thwart off-payroll working and ‘managed service companies’ (multiple workers are shareholders and offer services in company’s name)

Question 5

Basis of assessment for employment income

Answer 5

• assessed in the tax year it was received not necessarily earned.
• deemed received the earliest of:
  1. date income actually received by employee
  2. date employee becomes entitled to receive

Question 6

Employment income examples

Answer 6

• wages
• bonuses
• expense allowance
• payments on termination
• pensions
• benefits in kind
• certain social security benefits

Question 7

Non-taxable employment income examples

Answer 7

• trivial benefits <£50
• staff canteen meals
• staff parties
• parking space
• ‘green commuting’
• mobile phone
  -employers pension contribution
• removal expenses <£8000
• approved milage allowances

Question 8

Approved mileage allowances

Answer 8

• employees using their own vehicle for business travel can receive tax-free mileage allowance so long as the don’t exceed the HMRC approved milage allowance payment

Question 9

approved rates for motor cars and vans

Answer 9

45p/mile for first 10,000miles then 25p/mile

Question 10

What happens if:
1. milage allowance recieved exceeds AMAP
2. milage allowance recieved is less than AMAP

Answer 10

1. the excess is taxable
2. the deficit is a deductible expense

Question 11

deductible expenses

Answer 11

Expenses incurred wholly, exclusively and necessarily in the performance of the duties of the employment

Question 12

Deductible expenses examples

Answer 12

• contributions to an occupational pension scheme when deducted from pay
• subscriptions to professional bodies
• payroll scheme donations
• travel and subsistence expenses necessarily incurred

Question 13

Disallowed expenses examples

Answer 13

• cost of employee’s travel between home and work
• entertaining expenses (may be set against sums received from employer specifically for that purpose)

Question 14

Termination payments

Answer 14

• fully exempt from tax if they are:
  1. made on death of employee
  2. made due to injury or disability
  3. lump sum pension payments
• contractually entitled payments are fully taxable

Question 15

Discretionary payments or redundancy pay

Answer 15

exempt from income tax up to £30,000

Question 16

Pay as you earn

Answer 16

employers required to deduct income tax and national insurance contributions from employees when paying them their wages and salaries

Question 17

When does the tax under the PAYE system have to be paid?

Answer 17

• paid over to HMRC within 14 days of the end of tax month or within 17 days if made electronically
• when average monthly payments does not exceed £1,500, may make quarterly payments

Question 18

Tax codes

Answer 18

HMRC issues a tax code for each employee each tax year which represents the amount the employee can earn before paying income tax

Question 19

What does an employee’s tax code take into account?

Answer 19

• personal allowances
• tax reliefs and allowable expense
• adjustments required to collect tax on BIK
• adjustments for tax under/overpaid in previous years

Question 20

P2

Answer 20

notice of coding

Question 21

P11D

Answer 21

employee’s BIK and expenses

Question 22

P45

Answer 22

used when an employee leaves

Question 23

P60

Answer 23

details of an employee’s total pay, tax and NICs for the year

Question 24

Share incentive plans

Answer 24

may acquire free shares in the company/ can purchase shares without paying tax or NICs on the salary used for this purpose

Question 25

Approved share option schemes

Answer 25

may acquire share options in the company without paying income tax or NICs on either the grant or the exercise of the option

Question 26

Enterprise management incentives

Answer 26

company may grant share options to selected employees. No income tax or NICs charge on the grant of the option and the income tax charged on the exercise of the option is restricted