Tax and employment - 1 April 2011
Tax and employment
Tax and employment - 1 April 2011
Tax and employment
Tax and employment - 1 April 2011
Areas where our advice solves problems and adds value
Checking your PAYE code
Putting together an attractive and tax-efficient remuneration package
Obtaining an HM Revenue & Customs reporting dispensation to cut down on paperwork and compliance costs
Maintaining ‘adequate’ records of mileage and expenses
Reducing NIC costs
Understanding the tax and NIC costs of company cars
Reducing the cost of company cars, and reviewing the alternatives
Replacing company cars with company ‘vans’
Many people can go for years paying too much (or, perhaps more worryingly, too little) tax. PAYE aims to collect, over the course of a tax year, approximately the right amount of tax from your earnings.
Many people can go for years paying too much (or, perhaps more worryingly, too little) tax. This has not been helped by errors made by the tax authorities.
PAYE aims to collect, over the course of a tax year, approximately the right amount of tax from your earnings. This is done by the issue of one, or sometimes a series of tax codes, which are used by your employer to calculate the tax to be deducted from your earnings.
Many employees have incorrect tax codes. In particular, they may not have notified the tax office of changes in their circumstances that would affect their tax position, such as changing jobs and / or losing the benefit of a company car, or they may have started investing in a pension.
It is important that we check your PAYE code now, because it is much easier to rectify mistakes before the tax year ends. As a first step, though, look at your salary slip and see what code is currently being applied. The letter at the end of the code tells us whether your code includes one of the standard allowances, and you can see if this is right for your circumstances:
L includes standard personal allowance
P indicates that the employee is entitled to the lower single age allowance, i.e. an employee aged 65-74
Y indicates that the employee is entitled to the higher single allowance, ie - an employee aged 75 or over
T means that your code requires manual checking by HM Revenue & Customs each year
Or you may have the letter K at the beginning of your code. This is a special tax code and means that you are paying tax on more than just your salary through PAYE. It may be that the tax due on your state pension might be collected through increasing the tax you would otherwise pay on your company pension, or you may be receiving some rental income which is being taxed through your salary rather then you paying tax at the end of the year. If you owe back tax, this can also be collected by an adjustment to your tax code. A K code applies when the adjustments made reduce your allowances to less than zero - in effect, it means that you have a 'negative' tax allowance. The maximum tax which can be deducted using a K code is 45% of your income in each month.
Other codes include:
BR: This is used when all your income is taxed at the basic rate and is most commonly used for a pension. This code was also often used for a second job, but more commonly this is now coded 0T.
DO: This is used when all your income is taxed at the higher rate of tax
D1: This is used when all your income is taxed at the additional rate of tax
NT: This is used when no tax is to be deducted from your income or pension
Where loans from an employer total more than £5,000 at any time in the year, tax is chargeable on the difference between any interest actually paid and interest calculated at the 'official' rate (currently 4%). The exempt limit will be increased to £10,000 from 6 April 2014.
Your remuneration package
An attractive remuneration package can include any of the following:
Reimbursement of expenses
More generous expenses - business travel in first or business class, or a better quality hotel on business trips
Bonus or profit related award schemes
Share incentive arrangements
Life assurance and/or healthcare
Choice of a company car or additional salary and reimbursement of car expenses for business travel in your own car
Contributions to the additional costs of working at home
Other benefits in kind including, for example, an annual function costing not more than £150 per head, or long service awards
Of course, negotiating the appropriate package is a matter for you and your employer, but you should seek our advice to ensure that your overall package is as tax and NI efficient as possible.
Your employer is required to report expenses payments to HM Revenue & Customs on form P11D each year. To avoid paying tax on these payments you have to claim a deduction on your Tax Return - your employer will provide you with a copy of your 2013/14 P11D by no later than 6 July 2014.
This cumbersome process of reporting and then claiming expenses paid may be avoided if your employer has been granted a dispensation. Expense payments covered by the dispensation do not have to be reported to HM Revenue & Customs and they do not have to be included, with a counter-claim, on your own Tax Return. Payments covered by dispensations will be subject to review from time to time, including in the course of an HM Revenue & Customs inspection visit.
You may be able to claim tax relief for other expenses you incur in connection with your job, but the rules are very restrictive, and you may not always be able to claim for expenses you regard as reasonable work related expenditure.
Travel and subsistence
The rules which allow tax relief for travelling and subsistence expenses are quite complex, and subtle differences in your working arrangements can change the amounts which you are able to claim, or can be paid tax free. You will not normally be able to claim for the cost of travelling to your normal place of work, but if you have more than one place of work, sometimes travelling expenses are tax deductible when travelling to a temporary place of work for up to 24 months.
Site-based employees are able to claim a deduction for travel to and from the site at which they are working, plus subsistence costs when they stay at or near the site subject to meeting certain conditions.
Because the tax impact on your travelling expenses can be quite significant, you should ask for help if you are considering a change involving a long commute to work.
If an employee works from home, he or she may be paid an expense allowance of up to £4 a week by the employer without having to produce evidence of expenses.
If travelling on work, personal incidental expenses may be paid tax-free up to £5 a day in the UK or £10 a day overseas. This is designed to cover such odd expenses as newspapers and laundry that may not otherwise be allowable.
Employer contributions to your pension scheme or your own personal pension policies are not liable for tax or NICs. The employee's contribution attracts tax relief but not relief from national insurance.
You should be aware that while your employer can contribute to your personal pension scheme, these contributions are added to your own for the purpose of measuring your year's pension input against the annual allowance which is now £50,000. Extra relief may be available dependent on your level of contributions during the last three tax years. Please ask us or your normal pension adviser for advice. The annual allowance reduces to £40,000 for pension input periods ending in 2014/15.
Performance related pay
Although there are no tax breaks, performance related pay and bonus schemes are incentives to many to work harder and enjoy some of the benefits of the employer's increase in profits. There can, on the other hand, be a National Insurance saving for employees (not directors) if performance related pay is not included in the weekly or monthly pay, but instead paid as a one off bonus.
Company car tax rates - 23 March 2010
Company car tax rates
Tax and the company car Pt 2 - 6 January 2009
Tax free benefits
The provision of a car parking space at or near the employee's place of work is not an assessable benefit.
There is no tax for using a pool car. This is one where private use is merely incidental to the business use, and it is not normally used by one employee to the exclusion of all others.
Please note: A pool car must not normally be kept overnight at or near an employee's home.
"Lower Paid" Employees
The provision of a car for an employee (NOT a director) who is paid at a rate below £8,500 per year (including the value of benefits) does NOT attract any charge to income tax. Nor is there any charge on fuel for private use provided to such employees.
Special Consideration for Sole Traders
If your spouse is employed in your business (but not as a partner), it can be very tax efficient to provide them with a car, as long as they earn well below £8,500. The use of the car can be tax-free in their hands, and the business will get full tax relief on all the expenses connected with the car, provided you can demonstrate the car is necessary for business purposes.
Note that all benefits and salaries to a spouse must be justifiable. In other words, the remuneration must be at the same level that would have been paid to a non-spouse who did the same work.
Business use of an employee's own car
It is quite normal practice for employees to be reimbursed at a reasonable mileage rate for business use of their own cars.
A statutory system of tax and national insurance free mileage rates applies for business journeys in employees' own vehicles, as follows:
Cars and vans
On the first 10,000 miles in the tax year
45p per mile
On each additional mile above this
25p per mile
24p per mile
20p per mile
It is no longer possible to make a claim for tax relief based on actual receipted bills, nor claim capital allowances or interest on loans related to car purchases.
Note that the lower rate for more than 10,000 business miles only applies to income tax. The national insurance rate remains at 45p for any number of miles.
Unless the employee is reimbursed at a rate higher than the statutory mileage rate, the payments do not need to be reported on a P11D.
When an employee travelling on business carries fellow employees as passengers he may be reimbursed a further 5p per passenger tax free provided the journey is a business journey in respect of the passengers. No claim can be made if the employer does not make passenger payments.
The taxable benefit for the unrestricted use of company vans is £3,000 (with no reduction for older vans) plus a further £568 of taxable benefit if fuel is provided by the employer for private travel.
The tax payable on the use of a company van ranges from £600 up to £1,604 p.a., and the employer's Class 1A NIC payable ranges from £414 to £492 p.a.
Always check your tax code to see that the correct benefit is being applied.
Sole traders and partners should consider the potential tax advantages of providing their spouse with a company car.
If you have low private mileage, you may be better off if you pay for all your own private fuel.
If you have high business mileage, it may be better to use your own car and claim "mileage" from your employer.
Encourage your employer to apply for a P11D dispensation.
If you are on the borderline of "lower paid", think about setting up a contribution for the use of the car, to keep on the right side of £8,500.
Tax - free parking is a must!
Company cars - beyond 2014
From 2014/15, the taxable benefits tables are revised. These have now been published for tax years 2014/15, 2015/16 and 2016/17.
These reduce the thresholds for each percentage band of emissions.
From 2015/16, the 0% rate for electric cars are abolished. Such cars will have a percentage rate of 5%. Very low emissions vehicles (up to 50 g/km) will be taxed at 5%, with a 9% rate applying to emissions between 51g/km and 75 g/km. These rates will rise gradually over the next few years. Also from 2015/16, the upper scale is extended from 35% to 37%.
From 2016/17, the 3% premium for diesel engines is removed.
2013/14 company car taxable benefits table
CO2 emissions (g/km)*
1 to 75
76 to 94
95 to 99
100 to 104
105 to 109
110 to 114
115 to 119
120 to 124
125 to 129
130 to 134
135 to 139
140 to 144
145 to 149
150 to 154
155 to 159
160 to 164
165 to 169
170 to 174
175 to 179
180 to 184
185 to 189
190 to 194
195 to 199
200 to 204
205 to 209
210 to 214
215 and over
*The exact CO2 figure is rounded down to the nearest 5g/km.
Cars that cannot emit CO2 by being driven have a benefit of 0%.