LECTURE 6: Employment Income Flashcards
EMPLOYMENT INCOME
Includes wages, salaries, bonuses, expense allowances, benefits, tips, and some social security payments.
It is not necessary for the employee to receive the income directly from the employer. A long as the income is received as a result of the employment, it is taxable.
What is the basis of assessment?
Receipts basis.
i. e. earnings are received on the earlier of:
i. the date payment is made
ii. the date in which the taxpayer becomes entitled to the payment.
FOR DIRECTORS, ADD
iii. when amounts are credited in the company’s accounts or records.
iv. the end of the period of a/c, if the amount is determined by then, and if not,
v. when the amount is determined.
Example Director’s bonus For the y/e 31.3.17 (declared and paid 7.4.17) £4,000 For the y/e 31.3.18 (declared and paid 8.4.18) £5,000 Taxable 2017/18 4,000 is taxable as the 5,000 isn't declared by the year end.
What are the allowable deductions for employment income?
- Pension contributions
- Annual subscriptions to professional bodies
Otherwise expenses have to be incurred “wholly, exclusively and necessarily in performance of the duties of employment”
What is allowable and not allowable for travelling expenses?
Not allowable - home to permanent place of work.
Allowable in full:
- No permanent base (travelling appointments)
- Permanent base (travel from home to client/customer at temporary base unless journey is not significantly different from normal commuting NB temporary = 24 months or less)
What are the authorised mileage rates for tax free mileage allowances?
If an employee uses his own car for business and receives a mileage allowance from his employer, there are limits on the amount which may be paid tax free.
45p per mile for the first 10,000 miles per tax year.
25p per mile thereafter.
+5p per passenger
Any excess paid to the employee over the limits is taxable.
If the employee is reimbursed by an amount less than the limits of 45p and 25p (or not reimbursed at all) the difference is an allowable deduction.
What is the general rule of benefits?
The general rule is cost to the employer of providing the benefit (marginal cost per Pepper v Hart (1992) - schoolmaster paid 20% of normal school fees for his son to attend school)
Taxable benefit for living accomodation
The taxable benefit is the higher of:
- gross rateable, or annual value
- Rent, if any, paid by employer.
No benefit if job-related accommodation.
i. e.
- Necessary for the proper performance of the employee’s duties.
- Provided for the better performance of the employee’s duties and customary.
- Provided as part of security arrangements.
What is the additional benefit for expensive living accomodation?
(>£75,000)
Cost of providing accomodation LESS £75,000) * official interest rate (2.5%)
EXAMPLE
Employee occupies house which cost the employer £80,000.
Annual value £2,000
Employee pays rent of £1,500 p.a.
Official interest rate 2.5%
Taxable benefit:-
Annual value 2,000
(80,000-75,000)*2.5% 125
Rent by employee (1,500)
625
What else are employees assessed on the cost of the employer of?
Employees are also assessed on the cost to the employer of the following, if paid for by the employee:
- heating, lighting, cleaning, repairs and maintenance (100%)
- Provision of furniture (20% p.a.)
What is the company car benefit?
List price of the car less capital contribution by employee up to £5,000* a percentage graduated according to the level of carbon dioxide emissions of the car, as follows: 50g/km or less - 9% 51g/km to 75g/km - 13% 76g/km to 94g/km - 17% 95g/km - 18%
and then increasing by 1% for every extra 5g/km to a maximum of 37%.
Rounded down.
Diesel cars emit less CO2 than petrol driven cars, but harm the atmosphere with other pollutants, and so for diesel cars the percentages are increased by 3%, up to the overall maximum of 37%.
Examples
1. Petrol-driven car, list price £30,000, with 155 g/km of CO2 emissions.
155-95 = 12, 12 + 18 = 30
5
Benefit = 30% x 30,000 = £9,000.
- Diesel car, list price £15,000, with 122 g/km of CO2 emissions.
Always round down 122- 120 to nearest number divisible by 5.
120-95 = 5+18+3 = 26
5
Benefit = 26% x 15,000 = £3,900. - Diesel car, list price £18,000, with 209g/km of CO2 emissions.
- 209-> 205
205-95 = 22 +18 +3 = 43
5
Benefit restricted to 37% x 18,000 = £6,660.
- 209-> 205
What is the fuel benefit?
Private fuel is paid for by the employee.
Percentage as calculated above for car benefit*22,600.
What happens when there is reimbursement by the employee for use of car/fuel.
For use of car - reduce benefit by reimbursement.
For use of fuel - no reduction.
Beneficial loans
Amount of loan*official rate of interest, less
amount, if any , paid by employee
No benefit if loan is £10,000 or less.
A director has a loan of £20,000 at 1.5% interest. Official rate = 2.5%
Assessable benefit = 1% x 20,000 = £200.
Benefit for other assets made available for private use. (only given use of asset, does not belong to you)
Benefit per annum - 20%*market value when 1st provided
If the asset is subsequently acquired by the employee, the assessable benefit is the greater of:
- current market value
LESS amount paid by employee on acquisition. - Market value when first provided
LESS annual benefits (20%*?years)
LESS amount paid by employee
Example A video system was provided on 6 April 2013 for the use of a director, when its market value was £1,500. It was taken over by the director on 6 April 2017 for a payment of £100, when its market value was £600. What benefit is taxable in 2017/18? Solution Higher of £600 – 100 = £500, or, £1,500 – (1,500 x 20% x 4) – 100 = £200 i.e £500
Benefits where no tax charge arises
- Benefits aimed at encouraging employees to travel to work other than by car.
- Mobile or smart phones (one per employee)
- Relocation payments up to £8,000
- Entertainment up to £150 per employee
- Free meals in a staff canteen, if provided to all employees.
- The provision for overnight business trips, £5 per night if UK, £10 if overseas.
- The provision of workplace childcare, sports or recreation facilities.
- Trivial benefits - the cost of providing the benefit does not exceed £50.
