lecture 5 - employment tax Flashcards
what are the two tests needed for expenses in employment income?
wholly and exclusively test - for self-employed people
wholly, exclusively and necessary for business test - for employed people
what are employment earnings?
any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is in money or money’s worth.
means it includes bonuses, tips, non-cash payments
what is the basis of assessment for employment earnings?
in general employment earnings are receipts basis. this is the earlier of the date on which payment is made and the date on which there is an entitlement to payment - intended to prevent transfer of earnings.
how are directors earnings taxed?
in the tax year which contains earliest of:
date of receipt as determined by rules for all employees,
date of when payment charged in company’s accounting records,
end of company’s period of account in which amount arose provided it had been determined by then,
date on which amount is determined if it’s after the end of the accounting period.
what contract types suit employment vs self employment?
contract of service = employment
contract for services = self employment
what factors help determine if income is employment income? (as opposed to self employed trading income)
degree of control exercised over person doing work: less control exercised = more likely to be self employed.
whether they must accept further work: if you don’t need to, more likely to be SE
whether other party must offer further work: as above.
whether they provide their own equipment: own equipment leans towards SE. having space available in office counts, something that could be challenged
whether they hire their own helpers: if they hire their own, leans towards SE. if company provides staff support, more of an employee.
what degree of financial risk they take on: if takes loads of time compared to budget, is it your prob in terms of salary level? if it is, likely SE. if not, leans towards employee.
whether they can profit from sound mgment: the reward for the risk above.
whether they can work when they choose: do you have to be on site for core hours or are you left to complete the task at own rate?
what are the implications for the employer if they have employees (rather than self-employed contractors)
deduct PAYE, income tax and employee’s national insurance (class 1) - for each employee, from their gross pay.
account for benefits to employees and pay class 1A on assessed amount.
what is the penalty for an employer not taxing their employees?
penalties: if tax and NI not deducted, employer liable for all sums, plus penalties and interest. onus is on employer not employees.
how can taxpayers work out what deduction they can subtract from their income to compute employment income?
the employee must be obliged to incur and pay the expense as the holder of the employment. this means it is the needs of the job itself that’s important, not the preferences of the person doing the job. only deductible if every holder of the particular job would have to incur it (necessary for employment)
only expenses wholly and exclusively incurred in performance of duties will be allowable.
what has been specifically allowed by law as deductible from employment income?
contributions to approved pension schemes
subscriptions to professional bodies/societies approved by HMRC, provided relevant to duties of employment
payments to charities under payroll deduction scheme
expenses incurred in performing duties and reimbursed by employer (within limits)
capital allowances on p&m if owned by employee (rather than employer)
what is the general rule for travel expenses?
when incurred by employee, often paid for by employer. amount of allowance or reimbursement is included as income for employee and actual cost of journey is then deductible. travel expenses not reimbursed by employer may be deductible to employee.
what travel expenses are allowable for deduction from employment income?
from permanent place of work to visit a client and back.
where travel is normal part of employee’s job, e.g. service engineer moving around through day
travel to temporary workplace, like client’s office, even if from home - so long as it is because of nature of job and not just employee convenience or preference.
covering costs of things like overnight accommodation/alternative transport because of strikes
phone calls - business calls using private phone deductible, usually no line rental can be claimed unless can prove it was solely for work use.
work clothing - only specialist or protective.
working from home - if by choice not deductible. if you are required because of employer you will usually be able to claim part of additional domestic bills if not met by employer.
eduction and training - considered to be in addition to, rather than part of, duties of employment and so not deductible.
amount - full cost generally deductible regardless of what employer pays. includes accommodation or meals attributable to the travel, and car parking expenses.
what are the 4 classes of national insurance?
class 1 - paid by both employees as primary contributions and employers as secondary contributions
Class 1A: Benefits in kind, not chargeable to C1 but create a class 1A contribution for employers (not employees)
class 2 and 4 - self employed. Paid via self employed tax return. 3.45 a week provided annual profits at least 12570
class 3 - voluntary basis, by those who are working and earning money but otherwise would not pay enough contributions via other classes to entitle them to state pension when they retire. Anyone can pay 17.45 per week to maintain rights to some state benefits they might otherwise lose.
Class 4 - 9% profits between 12570 and 50270, then above this pay 2%.
what profits are used to calculate national insurance contributions?
taxable profits under trading income rules, less trading losses and any interest or annual payments to do with the business but not already deducted in working out trading profit. PA cannot be taken out.
normally paid at same time as income tax.
how does NI work on PAYE regarding age of employees?
employers don’t pay if employees are under 21. employees pay if they’re 16 or over. once employees over pensionable age they are not required to make further contributions, but employer contributions are still payable. don’t have to pay NICs for those on approved apprenticeship schemes up to 25, provided earnings below UEL below. if earnings are above, 13.8% paid on the excess.
