PAYE and Employee TAX
Employees’ income tax is collected by HMRC under the Pay As You Earn (PAYE) system. Each employee is given a tax code number and the employer deducts tax from earnings by reference to that number
Many code numbers are incorrect and you should always check your number and contact HMRC if you are unsure. Code numbers reflect many items, including tax you may owe on benefits in kind.
Common benefits include cars and private medical insurance.
If your employer reimburses you for expenses you incur whilst out on business, you would have thought that there could be no tax bill. However, this is not always the case and you should check the system used by your employer. Otherwise, you could end up paying too much tax.
At the end of each tax year, your employer has to send a summary of all of your benefits to HMRC, generally on form P11D. This will include all payments made to you to cover expenses such as subsistence and hotel bills. You, as an individual, can then write to HMRC and claim tax relief on expenses you originally paid out of your own pocket wholly for business purposes. Of course, the answer may be that nothing is taxable and so employers can ask to be excluded from this process if they write to HMRC. This is known as a dispensation.
Check whether your employer has a dispensation. If not you will need to make entries on your tax return to:
- • record the benefits and expenses as income
- • Claim a deduction for the business element of the expenses.
If you do not receive a tax return you should write directly to HMRC to make a claim.
Many employers pay a standard rate to mileage to all employees who use their own cars for business. The maximum rates that can be paid tax-free are set out in the legislation and are as follows:
Up to 10,000 miles – 40p Over 10,000 miles – 25p
If you are paid for business miles al less than the authorised rate, you can write to HMRC and ask for tax relief on the difference.
Dave is a basic rate taxpayer and
travels 4,100 business miles per
year in his car and is paid 32p per
business mile by his employer.
Dave’s tax relief claim is: £
4,100 miles @40p: 1,640
Less: actually paid
4,100 @32p: (1,312)
£328 x 20% = £65.60
Furthermore, the employer is able to pay an additional 5p per mile tax-free to the employee if they take a fellow employee on a business journey as a passenger.
Remember to check your mileage allowances and write to HMRC for your repayment of tax if appropriate.
Company cars are taxed by reference to the list price and the carbon dioxide (C02) emissions measured in grams per kilometre. Low emission cars (up to 130 gm/ km in 2010/11) are charged at 15% of the list price building up to a maximum of 35% for high emission cars (230 gm/km and above in 2010/11).
CO2 emissions are recorded on the Vehicle Registration Document (V5). If the car has a diesel engine there is a 3% supplement, up to a maximum of 35%, unless the car meets the Euro IV emission standards and was registered before 1 January 2006, in which case the supplement is waived
Discounts apply to certain environmentally friendly cars. A 10% rate applies to non-electric cars with emissions of no more than 120gm/km. Environmentally friendly discounts do not apply to these cars but the diesel supplement does. For cars registered before 1 January 1998, the charge is based on engine size
Remember to check your tax code to make sure the value of the benefits reflected in it, especially the company car, are correct. HMRC often make mistakes!
A separate charge applies where private fuel is provided in addition to a company car, unless the employee reimburses the employer for all private mileage (including travel between home and work)
The charge is calculated by applying the percentage figure used to calculate the company car benefit to a fixed figure which for 2010/11 is set at £18,000
If you are provided with private fuel, check the amount of tax you are paying compared to the actual cost of fuel on your private mileage. It may be that it is cheaper to opt out of employer provided private fuel and pay for it yourself
The provision of private medical insurance is a taxable benefit.
Private home telephone bills, including rental charges, which are paid for by the employer will be taxed as a benefit. There is no taxable benefit for private calls using a company mobile phone, limited to one phone per employee.
There is generally no benefit on the provision of home broadband access where the employer subscribes for the service for the employee’s home and the employee needs this access to carry out their job.
Social Functions for Employees
HMRC will not tax as a benefit a Christmas party or other annual functions provided the total VAT-inclusive cost of the events in a tax year is less than £150 per head.
Cheap or Interest-Free Loans
If loans made by the employer exceed £5,000 in a tax year, tax is chargeable on the difference between the interest paid and the interest due at the official rate, currently 4%. This situation often occurs with directors who overdraw their loan or current account and special attention should be paid to this issue, as HMRC often check upon it
In general employees’ national insurance (Nl) is not due on benefits in kind except vouchers, stocks and shares, the payment of an employee’s personal liability and benefits provided by way of ‘readily convertible’ assets
Most benefits in kind however are subject to Class 1A (an employer’s Nl contribution) As this currently amounts to 12.8% of the taxable value of the benefit, businesses may need to consider the tax efficiency of providing benefits
Generally contributions by your employer to a pension scheme are tax and Nl free. This may be far better than any other perk. If you plan to give up some of your ‘normal’ salary to do this, talk to us to make sure your salary sacrifice scheme is effective.
Employees are exempt from both tax and Nl on childcare provided in an employer operated nursery. This includes employees of other organisations if they work at the same location as the employer’s staff. There is no financial limit on the relief.
Childcare vouchers provided by the employer are also exempt from tax and Nl. However the exemption is limited to £55 per week for 2010/11 and any excess is liable to both tax and Nl.
Any registered childcare or approved home childcare contracted by the employer such as a local nursery, out-of-school club or childminder is exempt from both tax and Nl but as with vouchers the exemption is limited to £55 per week for 2010/11
Where schemes operate they should be open to all employees
How we can help
Whilst some generalisations can be made about PAYE and Employment TAX advice it is always necessary to tailor any advice to your personal situation therefore if you are need advice regarding PAYE or Employment Tax then please call Keith Rogers Accountants on +44 (0) 20 3145 0995 so we can arrange a No obligation FREE initial meeting at one of our offices. If you are interested in instructing us we will offer you a FIXED FEE service with no hourly charges or hidden costs. You have unlimited telephone support during our opening hours to assist you in making the correct strategic decisions. If you wish to view the other services that Keith Rogers Accountants offer then please visit our website KRA-Uk.com