M4: Employment Income Flashcards
When is employment income taxed?
Employment income is assessed for each tax year (6 April to 5 April).
Cash is taxed at the earlier of:
1. The time when payment is made; or
2. The time when a person becomes entitled to payment.
Benefits are generally treated as received when the benefit is provided.
What is included in the employment income calculation?
- Cash Earnings: Salaries, wages, and bonuses or taxable termination payments.
- Benefits: The value of benefits such as company cars or beneficial loans. Different calculation
rules apply depending on the benefit provided. Only taxable benefits are included. - Employment deductions: Certain payments and expenses incurred by the employee can be
deducted from employment income, these include pension contributions, travel expenses,
fees and subscriptions to professional bodies and charitable donations under a payroll giving
scheme.
What is the pro forma for an employment income calculation?
Salary, fees, bonus (i.e., earnings received) = X
Benefits (generally non-cash, e.g., company car) = X
Less: deductions (X)
= Employment income X
Which employee benefits are taxable, and which are not taxable?
Taxable:
1. Private use of company assets
2. Vehicles provided for private use
3. Private fuel
4. Company vans
5. Environmentally friendly transport
6. Beneficial loans
Some non-taxable benefits include:
* Payments to employees for use of own car for work purposes (approved mileage allowance).
* A parking space at or near the employee’s workplace.
* Work-related training.
* Sport or recreational facilities not generally available to the public.
* One mobile telephone for the employee’s use.
* Awards for staff suggestion schemes.
How is the private use of company assets assessed?
cash equivalent = 20% x market value of the asset when first provided.
How are beneficial loan arrangements assessed?
No taxable benefit if the loan is below £10,000 throughout the tax year.
If >£10k then either simple average way or weighted average.
Simple avg = Loan at 6/4 when made / 2 x n/12
+ Loan at 5/4 when repaid / 2 x n/12
Weighted = (Loan balance x n1/12) x ORI
ORI = Official rate of interest is 2.25%
How are company car benefits assessed?
(List car price pro-forma and company car benefits pro-forma)
List car price:
List price (actual price paid is irrelevant) X
+ All non-standard initial accessories and any later accessories costing > £100 X
- Employee capital contributions to cost of car (max £5,000 reduction) (X)
= Price for benefit calculation X
Company car benefits:
Basic benefit: Price of car × CO2 emissions figure percentage X (rounded down to near 5g)
- Reduction for periods of unavailability (>30 days) (X)
X
- Reduction for ongoing contributions to running costs (X)
= Taxable benefit (cash equivalent) X
How is private fuel assessed?
- Fuel provided for private mileage in personal vehicle: Use general rule (cost to employer) to calculate cash equivalent of the benefit.
- Fuel provided for company car. Benefit = £27,800 x CO2 emissions figure % for the company car.
How are company vans assessed?
No benefit if used for business, commuting and insignificant private use only.
What can be deducted in the employment income calculation?
- Contributions to an approved occupational pension scheme
- Necessary expenses:
* Obliged to be incurred and paid by the employee as holder of the employment.
* Incurred wholly, exclusively, and necessarily in the performance of their employment duties. - Travelling expenses
- Approved mileage payments
What is included in a taxable termination payment?
- Contributions to approved pension schemes: exempt
- Statutory redundancy payments: exempt
- Payment in lieu of notice (PILON): taxable as employment income
- Ex-gratia lump sum payments: May be fully taxable or tax free (up to a limit of £30,000 less
statutory redundancy payments) – depending on the circumstances.
If the employee has a contractual right or expects (based on past practice of the employer) to receive such a payment (which may include the value of any assets transferred), it will be taxable in full.
If the employee has no contractual right or expectation of a payment, up to £30,000 will be tax free, the amount of any statutory redundancy payment (though itself exempt) will reduce the
£30,000 tax free limit. Where assets are transferred on termination of employment the market
value will be used.
When do we ignore the list price of a car in calculating a taxable benefit?
When the car MV is more than LP, More than 15 yrs old and more than £15,000.
We should use the Market Value instead.
What method of taxing a loan can HMRC instruct a person to use?
They can only instruct ALTERNATIVE METHOD.
