Employment status Flashcards
Sole traders and partners in partnership
The self employed advantages are that they can claim expenses against their income, and so may finish up paying less tax and National Insurance.
However, they have fewer rights particularly
when it comes to statutory payments such as sick pay or maternity leave.
The self-employed are also responsible for paying their own taxes.
contract of service - employee
A contract of service means that the taxpayer has an agreement to
perform certain tasks as they are assigned to them. The contract is
ongoing and the individual will receive an ongoing payment for
their services. The individual will therefore be classed as an
employee
contract for service - self-employed
A contract for service is a contract to perform a specific task or tasks.
Once these tasks have been completed the relationship is at an end. There will be no ongoing payment and any further work will need to be agreed in a new contract. The individual will therefore be classed
as self-employed
Employment status - HMRC will ultimately decide on a person’s employment
status, but if the individual can answer ‘Yes’ to all of the following questions, it will usually
mean they are self-employed.
- HIRE someone to do the work for them
- risk their own money
- provide the main items of EQUIPMENT need to do the job
*agree to do a job for a FIXED PRICE regardless of how long the job may take - Can they decide WHAT work to do, HOW and WHEN to do the work and where to provide
the services? - regularly work for a NUMBER of different people?
- correct UNSATISFACTORY work in their own time and at their own
expense?
Directors
Directors are not strictly employees – they are ‘office
holders’. They probably won’t have a contract of service,
and they may not be entitled to a regular income and
may have a certain amount of autonomy as to how much
they can pay themselves. However, directors still have to
pay income tax on any remuneration they receive,
although there may be some differences in the calculations so that directors aren’t able to
manipulate the payments to gain a tax advantage.
When to tax an income
Normally the income is taxed at the time it is received.
but there are complications when it comes to additional payments such as bonuses and commissions.
The normal rule is that earnings are treated as received at the earlier of
x when a payment of earnings is actually made
x the time when a person becomes entitled to be paid a payment of earnings.
For example, a
contract may provide for a bonus for the year ended 31st December 2021, payable on 30th
April 2022. The employee is entitled to a payment relating to 31st December 2021 but isn’t
entitled to receive the payment of it until 30th April 2022. Therefore, it will be taxable on 30th
April 2022
When to tax an income - Directors have different rules
Their earnings are treated as being received at the earliest of
x when a payment of earnings is actually made
x the time when a person becomes entitled to a payment of earnings.
x the date when the amount is credited to the company’s accounting records.
x the end of the accounting period (if the amount has been determined by then)
x the date the amount is determined (if after the end of the accounting period).
Shane is a director of Locherne Ltd. On 24th April 2021, the company decided that Shane is
entitled to a bonus payment of £6,000 in relation to the company’s period of account which
ended on 31st March 2021. Shane is entitled to receive this bonus on 1st July 2021, but the
company actually credits the money to his directors’ account on 21st June. Shane doesn’t
actually withdraw the money until 3rd August.
The earliest of these dates is 24th April 2021, and so the bonus payment will be treated as
being received on this date.
PAYE
Pay As You Earn (PAYE)
All employers must deduct income tax from employees’ pay under the Pay As You Earn (PAYE)
scheme. The employee will therefore receive their pay net of tax (i.e., after the tax has been
deducted).
GROSS PAY is the amount the employee earns before any deductions for tax, National
insurance or pensions have been made.
NET PAY is the amount the employee receives after tax, National Insurance and pension
contributions have been deducted along with any other deductions.
TAXABLE pay is the amount on which tax will be calculated. This is usually less than gross pay,
as most people are entitled to a personal allowance.
The PERSONAL ALLOWANCE is an ANNUAL
amount on which the employee does not pay tax. For the 2021/22 tax year the basic personal
allowance is £12,570, so the first £12,570 of any income is tax-free.
Let’s suppose that an employee earns £27,000 per year and has the basic personal allowance.
Gross pay £27,000
Personal Allowance (£12,570)
Taxable pay £14,430
Remember that PAYE operates on each payment, so that the personal allowance will be
divided into 12 or 52 equal parts and applied to the payment for that period.
The personal allowance is not £12,570 for everyone. HMRC will adjust this amount
Most common company benefit is company car
. Car provided to the employee for business and private use will give rise to tax benefit. The way benefit is calculated is called SCALAR charge. The value of benefit will depend on CO2emissions of the car.
Where the benefit doesn’t have a specific cash value they are
known as Benefits in Kind (BIK) - company
cars, accommodation or beneficial loans - HMRC see these as part of the employment income.
Some company benefits have specific rules to work out the monetary equivalent of the
benefit. If there are no specific rules the employees will be taxed on the cost to the employer in providing the benefit.
There is no taxable benefit if there is no private benefit to the employee. So, there would be
no taxable benefit for an employee using a car entirely for business trips. (Remember that travel from home to work is usually considered private use and the car would then become
taxable).
The value of the benefit will usually be time apportioned where the benefit is not available for the whole year. For example, a benefit which is available from January to March would be calculated at 3/12 rather than 90/365)
Some employees are required to make a contribution towards the cost of the benefit. These contributions will be deducted from the total value of the benefit
Firstly find the list price of car - this includes vat but not any other discounts obtained.
If employee contributes towards capital, this deducted from list price but capped at max of £5000.
Cars registered from 6th April 2020 with CO2 emission between 51and 54g/km are charged at 13% - Before that date -add 2%supplement - diesel cars that doesn’t meet RDE2 stds have 4% supplement for after 6 April 2020 that is 17% Before that date diesel that doesn’t apply RDE stds 2% supplement 19%. If diesel car meets RDE2stds 4% doesn’t apply.
Cars with CO2 emissions above 54g/km increases by1% for every 5g/km up to a max of 37%
Formula for higher CO2 emission- round down the CO2 figure to next multiple of 5 , subtract 55 and divide by 5 then add basic 14%
Ex. CO2 = 164g/km. 160-55 = 105, 105/5=21, 21+14=35% ( for petrol and diesel that meets RDE stds. For petrol before 6april 2020= 37%. For diesel stays at 37% which is max.
If list price was £20000, 35%*20000= £7000 is the benefit to be added to normal salary to arrive at TOTAL employment income
If employee pays £100 per month - £7000-(£100*12) = 5800
If employee uses only for 6months, £7000/126=3500, £3500-(£1006)=2900.
Pool cars - pooled cars are not a taxable benefit as long as
they meet the rules laid down by HMRC.
P The rules are: the car is
x used by, more than one employee, not ordinarily used by any one employee to the exclusion of the others, any private use of the car is merely incidental to employees other use of it.
x by reason of the employee’s employment.
x that the car is not normally kept overnight on or in the vicinity of any residential
premises where any of the employees live.
Fuel benefit - Closely linked to company car benefit is fuel benefit. This benefit arises where the employer pays for the fuel for private use of the company car. (Remember that private use includes travel to from work to home)
It uses the same percentage rate as was calculated for the car benefit. This percentage is then applied to a specific figure. _For the 2021/22 tax year this
figure is £24,600 - will be given for assessment._
If we take the example shown for the car benefit where the percentage was calculated at
35%, the fuel benefit will be
£24,600 x 35% = £8,610.
-this is the amount which must be
added to other employment income to show the total employment income.
Unlike many other benefits, any contributions made by the employee towards the cost of the fuel will be ignored completely. Only if the fuel is paid for in full by the employee will there
be no fuel benefit at all.
However, this taxable benefit will be time apportioned if the vehicle is not available for the full year. In our example, if the car is available for only 6 months the fuel benefit will also be reduced.
£8,610 ÷ 12 x 6 = £4,305.
The value of taxable benefits is only shown in whole pounds and any rounding should always
be in the taxpayer’s favour. Here the benefit calculates to whole pounds.
Van Benefit - If a van is made available for private use, the calculation of the taxable benefit is quite
different - a car is constructed mainly to carry passengers, whilst a van is a vehicle of a construction primarily suited to the conveyance of goods or burden of any description, even if it looks like a car.
there have been disputes about it in the courts.
The calculation of the taxable benefit of a
van is a lot simpler (and often more beneficial to the taxpayer) than a car. Where the van is
made available to the employee for private use there is a flat charge of £3,490 (for the
2021/22 tax year), unless the van has CO2 emissions of 0. In this case, the benefit is 80% of normal benefit = 2792
If FUEL is provided by the employer for private use there will be a flat charge of £666 (for the 2021/22 tax year).
If the van is used for business purposes only, there will be no taxable benefit. For vans, unlike cars, travel from home to work does not qualify as private use.
Just like the car benefit, the van and fuel benefits are reduced when the vehicle is not
available.
Also, the van benefit is reduced if payments are made to the employer for private
use but as with cars, payments towards the fuel will only make a difference if the fuel is paid for by the employee in FULL.
Cheap (or ‘beneficial’) loans
An employer may give an employee a loan at a BENEFICIAL RATE or even interest-free. It is
considered to be a beneficial rate if the rate charged is less than HMRC’s official rate. For the 2021/22 tax year, the official rate is 2%.
The BENEFIT is the difference between the interest that should have been charged using the HMRC official rate and the interest that was actually paid.
There is NO taxable benefit where the outstanding amount is less than £10,000 throughout the year.
However, this covers all loans, and if a second loan takes the amount above the
£10,000 limit then there will be a taxable benefit on all the loans, not just the excess above £10,000.
There is also NO benefit if the loan is used entirely to buy equipment wholly for the business (although this does not apply to loans made to buy cars).
If a loan is written off by the employer then the whole
amount becomes a taxable benefit even if it is below the£10,000 threshold.
Where the capital amount of the loan remains the same throughout the year the amount of the loan is multiplied by the official rate. This is then compared to the interest actually paid and the difference
becomes the taxable benefit.
.Let us take the example of a loan of £16,000 which is given to an employee at a rate of 1.5%.
Assuming there were no capital repayments during the year, this would mean that there
would be interest of £240. (£16,000 x 1.5%).
Now we will compare this is the official rate.
£16,000 x 2.25% = £360
Now we will compare the two amounts
£360 - £240 = £120
So the taxable benefit will be £120
The complication comes when there is a capital repayment during the year.
Let’s take an example where a loan has been given to an employee of £40,000. The
outstanding amount at the beginning of the tax year is £40,000 but on January 6th 2022 the
employee makes a repayment of £16,000. The employee actually paid interest of £350.
The calculation of the benefit can be done in one of two ways. The interest using the official
rate can be calculated using the balance owed at each part of the year.
There will be 9 months where the balance was £40,000 and 3 months where the balance was
£24,000.
£40,000 ÷ 12 x 9 x 2.25% = £675
£24,000 ÷ 12 x 3 x 2.25% = £135
So, the total amount of interest using the official rate will be
£675 + £135 = £810
£350 was actually paid, so the benefit will be
£810 - £350 = £460
The alternative method is the one you will most probably use in the assessment.
Firstly, find the average loan throughout the year by adding the opening balance to the closing
balance and dividing by 2
£40,000 + £24,000 ÷ 2 = £32,000
Multiply this by the official rate
£32,000 x 2.25% = £720
Now deduct the amount actually paid
£720 - £350 = £370
So, the taxable benefit will be £370
As with many benefits, if the loan was not available for the whole year, then it will be time
apportioned.** For example, if the loan shown above was available for 6 months of the tax year
the taxable benefit will be reduced
£370 ÷ 12 x 6 = £185**
