Employment income Flashcards
Self employed tax advantages
- wider range of expenses allowed against income
- income tax is paid much later than employees
describe the contracts for the employed and self-employed
Employed - A contract of service
Self-employed - A contract for services
Criteria to distinguish between employed and self employed
- control
- remuneration and financial risk
- equipment
- work performance and correction
- holidays and sickness
- exclusivity
Personal service companies
- 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)
Basis of assessment for employment income
- 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
Employment income examples
- wages
- bonuses
- expense allowance
- payments on termination
- pensions
- benefits in kind
- certain social security benefits
Non-taxable employment income examples
- trivial benefits <£50
- staff canteen meals
- staff parties
- parking space
- ‘green commuting’
- mobile phone
-employers pension contribution - removal expenses <£8000
- approved milage allowances
Approved mileage allowances
- 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
approved rates for motor cars and vans
45p/mile for first 10,000miles then 25p/mile
What happens if:
1. milage allowance recieved exceeds AMAP
2. milage allowance recieved is less than AMAP
- the excess is taxable
- the deficit is a deductible expense
deductible expenses
Expenses incurred wholly, exclusively and necessarily in the performance of the duties of the employment
Deductible expenses examples
- contributions to an occupational pension scheme when deducted from pay
- subscriptions to professional bodies
- payroll scheme donations
- travel and subsistence expenses necessarily incurred
Disallowed expenses examples
- cost of employee’s travel between home and work
- entertaining expenses (may be set against sums received from employer specifically for that purpose)
Termination payments
- 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
Discretionary payments or redundancy pay
exempt from income tax up to £30,000
Pay as you earn
employers required to deduct income tax and national insurance contributions from employees when paying them their wages and salaries
When does the tax under the PAYE system have to be paid?
- 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
Tax codes
HMRC issues a tax code for each employee each tax year which represents the amount the employee can earn before paying income tax
What does an employee’s tax code take into account?
- personal allowances
- tax reliefs and allowable expense
- adjustments required to collect tax on BIK
- adjustments for tax under/overpaid in previous years
P2
notice of coding
P11D
employee’s BIK and expenses
P45
used when an employee leaves
P60
details of an employee’s total pay, tax and NICs for the year
Share incentive plans
may acquire free shares in the company/ can purchase shares without paying tax or NICs on the salary used for this purpose
