Employment Income Flashcards
What is Employment Income
It’s income received from employment including
-salaries, wages fees
-bonus and commissions
-tips (e.g. restaurants)
-employer-provided taxable benefits
What are Taxable Benefits
These are non-cash benefits provided by an employer
For example:
-Company car , tax based on C02 emissions & value (P11D value)
-Accommodation provided, taxable unless exempt
-Company assets for personal use. subject to tax
-Low interest loans from employers, taxable is below HMRC’s official rate
How is Pension Income Taxed
It’s taxed as employment income
A tax free lump sum which is 25% of pension withdrawals
What’s the timing of Employment Income Taxation
Salaris and Wages - Taxed in a year of receipt
Taxable benefits - Taxed in the year provided (company car benefit split across tax years)
Pensions % Unemployment Benefits - Assessed on an accruals basis
Employment VS Self-Employment
TAX/ NIC Differences:
Employees - PAYE, Class 1 NIC (employer + employee pay more in NIC)
Self Employed - Self Assessment, Class 2/4 NIC (often cheaper, more generous for taxpayers)
Expenses
Employees - Strict rules (wholly and exclusively for work)
Self Employed - Broader deductions in tax (e.g. home office, travel write off)
The 2 Advantages & Disadvantages of Self Employment
Advantages:
More tax-deductible expenses
Lower NICS than employees
Disadvantages:
No job security or paid leave
Responsible for own tax filings
The Gig Economy & Taxation
Workers for Uber ruled as employees (affecting VAT/NIC)
Deliveroo drivers ruled self employed so no obligation to accept work
What’s IR35
It’s a legislation that prevents disguised employment via ‘Personal Service Companies (PSCs)
It forces payroll treatment if work resembles employment
Companies prefer hiring self employed workers to avoid 13.8% Employer NIC
HMRC Employment Status Tests
Control Over Work:
Employment - Employer decides
Self Employed - Worker decides
Right to Substitute:
Employee - Can’t send substitute
Self Employed - Can hire replacements
Financial Risk
Employee - No risk
Self Employed - Bears financial risk
Equipment Provided
Employee - Provided by employer
Self Employed - Worker provides their own tools
Mutual Obligation
Employee- Employer must offer work, worker must accept
Self Employed - No obligation for future work
Loraraine Kelly & Eamonn Holmes Case example
Lorraine (Self-Employed)
Operated via own limited company
Had editorial independence
Tax savings £1.2m
Eamonn (Employee
Worked via a personal service company
ITV controlled his work
Owed £250,000 in unpaid taxes
What is the PAYE Scheme
Pay As You Earn is a system used to collect income tax from employees’ salaries
Employers deduct income tax and NIC from employees wages and sends it to HMRC using Real Time Information (RTI)
Failure to comply leas to penalties and employer liability for unpaid tax
Employees can claim refunds if over taxed
Legally are responsible for correcting the tax payment
PAYE Codes
1257L - Standard allowance (£12,570), for example, most employees
BR - Basic rate (20%) no allowance, for example, second jobs
D0 - Higher rate (40%) allowance, for example, high income second jobs
What are allowable deductions
These are expenses that reduce taxable income, but strictly limited for employees
Must meet the test ‘wholly, exclusively and necessarily incurred’ in employment
This is determined by legal precedent and attempts to codify have largely failed
5 Examples of Allowable Deductions
Pension Contributions - Pre tax deductions from salary (auto enrolment schemes)
Professional fees - If contractually required for the job
Payroll donations to charity - Qualifies for tax relief
Specialist Clothing - Only if not provided by employer (safety gear)
Work related travel - Not for daily commuting
2 Examples of Non-Allowable Deduction
Newspapers for journalists (not necessary)
Meals & General Living Costs
What are Tax Allowances
A portion of income that can’t be taxed
These are things like personal allowance -£12,570 (current tax-free threshold)
Additional allowances exist for specific expenses like travel and termination payments
Travel Allowance (What’s allowed)
Commuting = Never Deductible
Exceptions:
Temporary workplaces (under 24 months)
Itinerant workers (e.g. repair engineers
Business journey from home (not commuting)
Mileage Allowance (2023/24)
Car/Van:
45p/ mile up to 10K
24p/ mile over 10K
Motorcycle:
24p/ mile up to 10K
24P/ mile over 10K
Bicycle:
20p/ mile up ro 10K
20p/ mile over 10K
Employer Reimbursement Rules
If employer reimburses at or below HMRC, it’s tax free
If employer pays more, the excess is a taxable benefit
If employer pays less allowance, employee can claim difference as a tax deduction
Example:
Employer pays 50per mile instead of 45p, the extra 5p per mile is a taxable benefit
Payments on Termination of Employment
If these payments go up to £30K, redundancy pay is tax free
Statutory redundancy pay is always included in the tax free £30K limit
What are the 4 Fully Taxable Payments (PHDU)
Unpaid salary and bonuses
Holiday pay (as it was contractually earned)
Payments in lieu of notice (if in the contract)
Discretionary Cash Gifts (if not contractual, may fall under the £30K tax free limit so are partly taxable
