Employment income

Question 1

What contract does an employee have?

Answer 1

Contract of service

Question 2

What contract does an Self-employed person have?

Answer 2

Contract for services

Question 3

What are the 8 features of a contract of service/employment relationship?

FEW TASKS

Answer 3

1. F: Fixed hours – Set times and places to work.
2. E: Employer provides equipment.
3. W: Work must be done personally by the employee.
4. T: Tasks must be accepted – Employer offers work.
5. A: Assigned work must be completed by the employee.
6. S: Sick days and holidays are paid.
7. K: Key financial risks are borne by the employer.
8. S: Schedule control – The employee cannot choose hours or location.

Question 4

What are money earnings?

Answer 4

Salaries, wages, commissions, bonuses, fees and tips.

Question 5

What constitutes taxable benefits in the context of employment?

Answer 5

Taxable benefits (often referred to as benefits in kind) are non-cash perks or advantages provided to employees by their employer that are subject to income tax. These benefits are considered a form of additional income, and as such, they are taxed.

Taxable benefits can include items such as company cars, private medical insurance, and accommodation provided by the employer. The value of these benefits is calculated and added to the employee’s income for tax purposes, reflecting their total compensation package.

Question 6

What are termination payments?

Answer 6

Payments made on termination of employment (redundancy).

Question 7

How is the basis of assessment defined in relation to income tax?

Answer 7

The basis of assessment determines which income is taxed in a specific tax year, identifying what should be included in the income tax calculation for that fiscal period.

This basis is crucial for accurately reporting income, as it ensures that taxpayers only include income earned within the relevant tax year in their tax calculations, aligning with the period for which they are being assessed.

Question 8

When is employment income taxed?

Answer 8

In the fiscal year in which it is received which is determined by the earliest of:

• The date of payment
• The date entitlement arises

Question 9

When is a Director’s Employment Income Taxed?

Answer 9

Director’s income is taxed in the fiscal year it is received, determined by the earliest of:

1. Date of payment
2. Date entitlement arises
3. Date credited in company account
4. End of company’s accounting period, if the amount is decided by then
5. Date the amount is determined, if after the accounting period

Question 10

Calculation of Employment Income

Answer 10

Employment Income = Gross Income + Assessable Value of Benefits - Allowable Deductions

Gross Income includes salary, wages, bonuses, and other forms of remuneration. Assessable Value of Benefits refers to the taxable benefits received from the employer, while Allowable Deductions are any expenses that can be deducted from income, such as certain work-related costs.

Question 11

What are benefits in kind?
Give 3 examples

Answer 11

Benefits in kind are non-cash rewards provided to employees as part of their employment, which are taxable as they hold value similar to money.

Examples include:

• Company car
• Television (provided by employer)
• Accommodation

Question 12

On what form are the assessable benefits submitted?

Answer 12

The P11D form

Question 13

How do you calculate benefits in kind?

Answer 13

1. Calculate the Benefit: Determine the total value of the benefit received.
2. Prorate the Benefit: Adjust the benefit value based on the period it was available during the tax year.
3. Deduct Employee Contributions: Subtract any contributions made by the employee towards the benefit, if applicable.

This calculation ensures that the taxable benefit reflects the actual value received by the employee, taking into account the duration of the benefit’s availability and any employee contributions, thereby providing a fair assessment for tax purposes.

Question 14

How is the taxable benefit for a company car with private use calculated?

Answer 14

The taxable benefit for a company car used privately is calculated as:

List Price × Relevant Scale Charge %

List Price refers to the car’s full retail price (including options), and the Relevant Scale Charge % is based on the car’s CO₂ emissions. The higher the emissions, the higher the percentage applied.

Question 15

What is the treatment of discounts when determining the taxable benefit of a company car?

Answer 15

All discounts are ignored, and the full list price of the vehicle is used when calculating the company car benefit.

The full list price means the manufacturer’s price, including any additional features, regardless of any discounts or deals offered at the time of purchase.

Question 16

How are capital contributions considered in the calculation of a company car benefit?

Answer 16

Capital contributions made by the employee, up to £5,000, are allowed to reduce the list price of the car for tax purposes.

Capital contributions refer to payments made by the employee towards the cost of the car. These contributions reduce the taxable benefit, but only up to a maximum of £5,000.

Question 17

How do you round levels of emissions?

Answer 17

You always round down.

Question 17

What happens to contributions toward the running cost of a company car?

Answer 17

If the employee makes regular contributions toward the running costs, these amounts are deducted from the value of the taxable benefit.

Contributions toward running costs include payments made by the employee for fuel or maintenance, which reduce the taxable benefit for private use of the company car.

Question 18

What happens when the period of benefit is less than 12 months for a company car?

Answer 18

The benefit is time apportioned.

Question 19

What is the maximum percentage of car benefit

Answer 19

The maximum percentage of the car benefit is 37%.

The 37% is the highest scale charge percentage applied to the list price of a company car, based on its CO₂ emissions. This is the maximum taxable rate for cars with high emissions.

Question 20

What happens if there is no private use on the company car?

Answer 20

There is no taxable benefit.

Question 21

What are the conditions for a pooled car?

Answer 21

1. Used by More Than One Individual: The car must be available for use by multiple employees.
2. Private Use Is Incidental: Any private use of the car must be minor and not a primary purpose.
3. Not Kept Overnight at Employee’s Home: The car cannot be stored overnight at or near an employee’s home.

These conditions ensure that pooled cars are primarily used for business purposes, reducing the taxable benefit associated with personal use and helping to comply with tax regulations.

Question 22

How are hybrid cars car benefit calculated?

Answer 22

The same as normal cars.

Question 23

How are car accessories and modifications treated for tax purposes?

Answer 23

• Before the Car Is Made Available: Accessories are added to the car’s list price.
• After the Car Is Made Available: If the accessories’ value exceeds £100, the full amount is added to the list price for the entire tax year.
• Work or Disability Modifications: These modifications are excluded from the list price.

Accessories added before a car is made available or exceeding £100 after availability increase the car’s taxable value. However, modifications made for work or disability purposes are exempt from being added to the taxable benefit.

Question 24

What happens if a car is more than 15 years old?

Answer 24

If the car is more than 15 years old and its market value exceeds £15,000 and is higher than the original list price, the market value is used instead of the list price for calculating the taxable benefit.

For older cars, if their market value exceeds both £15,000 and the list price, the market value is used to calculate the taxable benefit, ensuring fair taxation on classic or valuable vehicles.

Question 25

What is the method for calculating the fuel benefit for company-provided vehicles?

Answer 25

The taxable benefit for company-provided fuel for private use is calculated as:

£27,800 × Relevant Scale Charge %

The £27,800 is a fixed value for the fuel benefit charge (for the 2023/24 tax year), and the Scale Charge % is based on the CO₂ emissions of the vehicle, similar to the company car benefit calculation. This determines the taxable amount for fuel provided by the employer.

Question 26

What happens to an employee contribution towards the cost of fuel?

Answer 26

Employee contributions toward the cost of fuel do not reduce the taxable amount. To avoid the fuel benefit charge, the employee must reimburse the cost of all private fuel.

Unlike other benefits, partial contributions toward fuel don’t reduce the taxable fuel benefit. The employee must fully reimburse the employer for all private fuel use to eliminate the fuel benefit charge.

Question 27

When is there a van benefit?

Answer 27

A van benefit arises if the van is provided for private use. However, commuting between work and home is not considered private use and is not a taxable benefit.

Private use refers to using the van outside of work-related activities. Driving the van to and from home for work purposes is generally excluded from being treated as a taxable benefit.

Question 28

How is the van benefit calculated?

Answer 28

The van benefit is calculated using a fixed taxable amount of £3,960 per annum.

The £3,960 is a fixed taxable benefit amount for the van provided for private use, regardless of the van’s value or usage frequency (as of the 2023/24 tax year).

Question 29

What is the van fuel benefit?

Answer 29

The van fuel benefit is a flat rate of £757 per annum for private use of employer-provided fuel.

The £757 is a fixed amount (for the 2023/24 tax year) that applies when the employer provides fuel for private use in a company van. This is separate from the general van benefit.

Question 30

Is there a fuel benefit for vans with zero CO₂ emissions?

Answer 30

For vans with zero CO₂ emissions (e.g., fully electric vans), the fuel benefit is nil. There is no taxable fuel benefit for electricity provided.

Fully electric vans have no fuel benefit charge, as electricity is not treated as a taxable fuel for benefit-in-kind purposes.

Question 31

How is job-related accommodation taxed?

Answer 31

There is no calculation for job-related accommodation, as it is considered an exempt benefit.

Job-related accommodation is exempt from tax if it is provided for the employee’s duties and is necessary for the performance of their job, meaning no taxable benefit arises.

Question 32

What are the 3 except criteria’s for job related accommodation?

Answer 32

Job-related accommodation qualifies as exempt if it meets one of the following criteria:

1. Necessary: The employee is a representative occupier (e.g., caretaker).
2. Improves performance: The accommodation is customary for the role (e.g., pub landlord or vicar).
3. Personal security: The accommodation is provided for personal security (e.g., government minister).

These criteria ensure that the accommodation is essential for the employee’s job duties, improving performance or ensuring safety, thus qualifying for tax exemption.

Question 33

When is job related accommodation an exempt beneift for a director?

Answer 33

Job-related accommodation is considered an exempt benefit for a director if:

1. The director has no material interest in the company (holding less than 5% of the shares), and
2. One of the following applies:

• The director works full-time for the company.
• The company is a non-profit making organization or a charity.

These conditions ensure that the accommodation provided to directors is necessary for their role without giving them a personal financial interest that could affect the exemption status.

Question 34

How is the taxable benefit calculated when an employer provides accommodation to an employee, and the employer either owns or rents the property?

Answer 34

• If the employer owns the property: The employee is taxed on the annual value (deemed rent).
• If the employer rents the property: The employee is taxed on the greater of the rent paid by the employer or the annual value.

Annual value refers to the estimated rental income the property would generate on the open market, while rent paid by the employer applies when the property is rented. The higher of the two amounts is used when calculating the taxable benefit for the employee.

Question 35

What is the Additional Charge Calculation if the Property Costs More Than £75,000?

Answer 35

The additional charge is calculated as:

(Cost - £75,000) × 2.25%

Cost includes the original purchase price of the property plus any improvements made before the start of the tax year. This calculation applies when the property’s value exceeds £75,000, resulting in an extra taxable benefit for the employee.

Question 36

What is the impact on the taxable benefit calculation if the employer purchased the property more than 6 years before the employee moves in?

Answer 36

If the employer bought the property more than 6 years prior to the employee moving in, the market value at the time the employee occupies the property is used instead of the original purchase cost for calculating the taxable benefit.

The market value is the current value of the property when the employee moves in, replacing the original cost if the property was purchased more than 6 years earlier. This ensures that the taxable benefit reflects the property’s current worth.

Question 37

What Happens if an Employee Contributes to the Annual Rent?

Answer 37

If an employee contributes to the annual rent, the contribution is deducted from the taxable benefit, no matter the situation.

Any employee contributions toward rent directly reduce the taxable benefit amount, regardless of whether the employer owns or rents the property. This ensures the employee’s payments lower the taxable benefit accordingly.

Question 38

What Happens When an Employer Pays Living Expenses for Job-Related Accommodation?

Answer 38

When an employer pays for living expenses in job-related accommodation, it is treated as a cost to the employer, but the taxable benefit is capped at 10% of the employee’s earnings and other non-job-related benefits.

The 10% cap ensures that the taxable benefit for living expenses doesn’t exceed a reasonable portion of the employee’s earnings, offering a limit on how much of the expense can be taxed.

Question 39

How are living expenses treated when an employer pays for non-job-related accommodation?

Answer 39

When an employer pays living expenses for non-job-related accommodation, it is considered an expense to the employer. If furniture is provided, the benefit will be treated as an asset made available for private use.

The taxable benefit for non-job-related accommodation includes both living expenses and any furniture or assets provided for personal use, adding to the overall benefit value.

Question 40

What is the calculation for assets made available for private use?

Answer 40

The taxable benefit for assets made available for private use is calculated as:

Market value x 20%

The market value refers to the current value of the asset, and the 20% rate applies annually to determine the taxable benefit for private use of the asset.

Question 41

How is the taxable benefit calculated when an employee acquires an asset that was previously made available for private use?

Answer 41

When an asset made available for private use is later acquired by the employee, the taxable benefit is the higher of:

• The market value of the asset at the time it is gifted, or
• The market value at first use, minus any benefits already taxed for the use of the asset.

This calculation ensures the employee is taxed fairly, either based on the value of the asset at the time of gifting or its original value adjusted for prior taxable benefits, whichever results in a higher taxable benefit.

Question 42

How is the taxable benefit for cash vouchers determined?

Answer 42

The benefit for cash vouchers is the value of the voucher itself.

This means that the entire amount of the cash voucher is considered taxable income for the employee, as it represents a direct financial benefit received.

Question 43

What is the taxable benefit for non-cash vouchers?

Answer 43

The taxable benefit for non-cash vouchers is the cost of the voucher.

This amount reflects the total expense incurred by the employer for the voucher, and it is considered taxable income for the employee, as it represents a benefit received that can be used for purchasing goods or services.

Question 44

Is a loan under 10,000 considered a taxable beneift?

Answer 44

Generally, loans under £10,000 are not considered a taxable benefit in the UK. This means that employees who receive such loans from their employers do not need to report them as income for tax purposes.

Question 45

What is the taxable benefit for a loan?

Answer 45

The taxable benefit for a loan is the difference between the interest actually paid by the employee and the ‘official rate of interest’, which is currently set at 2.5%.

This calculation reflects the benefit received by the employee from having access to a loan at a lower interest rate compared to the official rate, thus representing a taxable financial advantage.

Question 46

How Is the Loan Benefit Calculated?

Answer 46

To calculate the loan benefit, use the formula:

Average Loan (Loan Start Year + Loan Year End) / 2 × Official Rate of Interest (2.5%) × (n / 12) - Interest Actually Paid.

Here, n represents the number of months the loan was outstanding during the tax year. This calculation determines the taxable benefit by comparing the interest the employee would have paid at the official rate against the actual interest paid.

Question 47

What happens if a loan is written off?

Answer 47

If a loan is written off, a taxable benefit will arise based on the amount written off. This rule applies to all loans that are written off.

The amount that is written off is considered a financial benefit to the employee, and it is treated as taxable income, thereby impacting the employee’s overall tax liability for the year.

Question 48

What 8 deductions can reduce the taxable benefit amount?

Answer 48

1. Occupational Pension Schemes: Contributions are paid gross, providing full tax relief at source.
2. Personal Pension Schemes: These extend the basic rate band for tax relief purposes.
3. Charitable Donations: Donations made through approved schemes.
4. Qualifying Travel Expenses: Work-related travel costs.
5. Allowable Mileage Rates: HMRC-approved mileage rates for personal vehicles used for business purposes.
6. Entertaining and Subsistence: Business-related hospitality and meal expenses.
7. Professional Fees and Subscriptions: Approved professional membership fees.
8. Reimbursement of Expenses: Employer-paid expenses to the employee.

These allowable deductions help reduce an employee’s taxable benefit by accounting for various business-related and pension costs, which are excluded from the final taxable amount to provide a fairer tax assessment.

Question 49

What mileage rates can employees claim for business travel?

Answer 49

• First 10,000 miles: 45p per mile.
• Over 10,000 miles: 25p per mile.
• Passenger Miles: 5p per mile (for each passenger carried for work purposes).
• Motorcycle Miles: 24p per mile.
• Bicycle Miles: 20p per mile.

Question 50

How is employment income calculated using a proforma?

Answer 50

• Salary: £X
• Bonus/Commission: £X
• Benefits in Kind: £X

Net Total: £X

Less:

• Allowable Deductions: £X
• Occupational Pension Contributions: £X
• GAYE (Gift Aid): £X
• Travel Expenses: £X
• Professional Fees/Subscriptions: £X
• Allowable Expenses: £X

Employment Income: £X

This proforma breaks down the calculation of employment income by first listing gross income sources (salary, bonuses, and benefits), then subtracting allowable deductions and expenses to determine the taxable employment income.

Question 51

What 6 tax planning strategies can help minimize income tax liability on employment income?

Answer 51

• Taking advantage of exempt benefits whenever possible.
• Choosing cars with lower CO₂ emissions to benefit from lower taxable car benefits.
• Repaying all private fuel or none at all; alternatively, ensure any contributions towards the car are not classified as fuel contributions.
• Avoiding contributions over £5,000 towards the list price of a company car.
• Utilizing allowable deductions such as pension contributions to reduce taxable income.
• Opting for benefits in kind instead of salary or bonuses, as no National Insurance contributions are payable by employees on benefits in kind.

Effective tax planning strategies can help employees optimize their compensation packages, reducing their overall tax liabilities while maximizing the benefits they receive. It’s essential to stay informed about current tax regulations and available exemptions to make the most of these opportunities.

Question 52

What classification does employment income fall under in the income tax computation?

Answer 52

Non-savings income.

Non-savings income refers to earnings derived from employment, including salaries, bonuses, and benefits in kind, and is subject to income tax at the individual’s applicable tax rates. This classification is crucial for determining overall tax liability and potential deductions.