ACC3140 - Taxation

Lecture 03 –
Employment Income
OUTCOMES

• Employed or self-employed?
• Basis of assessment for an employee
• Termination payments
• National Insurance Contributions
• PAYE system
• Benefits-in-kind
• Taxable values of benefits-in-kind
• Share Incentive Schemes
• Employment expenses and pension
contributions
• Complete a self-assessment tax return
Employment income

• Wages, salaries, bonuses, commissions,

termination payments, benefits in kind,
pensions
– Includes tips even though not paid by the
employer
• Retirement pension
• Job seeker’s allowance

Slide 3 15/12/2019
EMPLOYMENT AND
SELF-EMPLOYMENT handbook p40

• Self-employed people have

certain tax advantages
compared to employees
– Wider range of expenses
– Pay tax later
• Not a choice, but a matter of fact
• Contract of service = employee,
or
• Contract for services = self-
employed
CASE LAW

• Personal service
• Mutuality of obligation
• Right of control
• Right of substitution and engagement of
helpers
• Provision of own equipment
• Financial risk
• Opportunity to profit
• Employee -type benefits
• Mutual intention

Balance of evidence
Hall v Lorimer
 TERMINATION PAYMENTS handbook p39

Fully exempt Fully taxable Partially exempt

Payments made Payments to which Payments made at

on death the employee is employer’s
contractually discretion, or
Payments made entitled. redundancy
because of injury payment after loss
Also payments in
or disability of employment, are
lieu of notice even
if not contractual exempt up to
Lump sum £30,000
payments from
pension schemes
NICs

Charged on earnings over the earnings

Primary Class 1: threshold (£166pw for 2019/20) up to the
paid by Upper Earnings limit (£962pw for
employees 2019/20) at 12%. 2% on earnings over
the UEL
Secondary Class Charged on all earnings over the
1: paid by earnings threshold (£166pw for
employers 2019/20) at 13.8%.

Class 1A: paid

paid by employers on benefits in kind
by employers
at 13.8%.

NB earnings threshold not the

same as the personal allowance
Lecture Example

Jane earns £200 per week. Compute the

Class 1 contribution paid by:

a) Jane

12% x (200 – 166) = £4.08

b) Her employer

13.8% x (200 – 166) = £4.69

Lecture Example

Jill earns £2,000 per month. Compute

the Class 1 contribution paid by:

a) Jane

12% x (2,000 – 719*) = £153.72

b) Her employer

13.8% x (2,000 – 719*) = £176.78

*166 x 52/12
PAYE handbook p42

Employers deduct
Income Tax and Paid over to HMRC,
NICs from gross with employer’s
pay NICs
CODES

• Income tax free amount

• PA, adjusted for benefits, arrears,

expenses

• Divide answer by 10

• £12,500 (19/20) becomes 1250

• £11,850 (18/19) becomes 1185.

• Letter at end
• L for basic personal allowance
OTHER CODES

• BR = basic rate

• D0 = 40%

• K = negative code

• NT = no tax
PAYE Forms

• Forms
• P11D: Reporting benefits in kind
• P45: For employee leaving
• P60: Details of salary for the year and tax/NICs
deducted

The PAYE Real Time Information (RTI) system has now been introduced. This removes
the need for end-of-year forms to be sent to HMRC showing each employee's gross pay,
tax paid and NICs for the year. Form P45 is also transmitted as part of the RTI process.
P11Ds are not required if the employer (voluntarily) deals with benefits in kind through the
RTI system.

Slide 13 15/12/2019
LECTURE ACTIVITY 1

1. Someone receives £40,000 as compensation for

being unfairly dismissed. How much is taxable?

£30,000 is exempt so £10,000 is taxable

2. What is the primary and secondary NIC liability of

someone earning £180/week in 2018/19?

Primary = 12% x (180-166) = £1.68

Secondary = 13.8% x (180-166) = £1.93

Benefits in kind

• The general principle for taxing benefits in kind is that the

taxable amount is the cost to the company of providing the
benefit.
– To ensure that there is no tax advantage in providing
benefits instead of salary
• The Supreme Court held in Pepper v Hart that the
appropriate ‘cost’ principle was marginal cost (and not full
cost or opportunity cost)
• Special rules apply to some benefits, notably living
accommodation, company cars and interest-free loans.

Slide 15 15/12/2019
 Trivial benefits

• Benefits in kind costing no more than £50 are regarded

as "trivial" and are exempt from both income tax and
NICs
• But this exemption does not apply to cash or cash
vouchers and the benefit must not be provided in
recognition of particular services performed by the
employee
• The exemption cannot be used to exempt part of a
benefit costing over £50
• The exemption is capped at £300 per tax year for the
directors of a close company
BENEFICIAL LOANS

• Loan made by employer to employee or

family
• Zero/low interest, compared with official
rate (assume 2.5% for 2019/20)
• No taxable benefit if loan <£10,000
• Taxable if loan is written off

Slide 17 15/12/2019
BENEFICIAL LOANS

Employer makes an interest-free

loan to employee of £200,000.
Taxable benefit is:
£200,000 x 2.5% = £5,000
Living Accommodation

• If a property is provided to an employee, the taxable

benefit is the ‘annual value’ of the property
– Or the rent paid by the employer (if rented rather
than owned) if that is higher than the annual
value.
• The taxable benefit is reduced by any contribution
made by the employee
• No taxable benefit if the accommodation is ‘job-
related’

Slide 19 15/12/2019
• The annual value is the ‘rateable value’ which was
used in the calculation of domestic rules before they
were replaced by council tax
• If the property cost more than £75,000, there is an
additional taxable benefit based on the official rate
of interest.
• If the property was acquired by the employer more
than 6 years before it was first made available to
the employee, ‘market value’ is used instead of cost

Slide 20 15/12/2019
 Living accommodation -
owned by employer

Employees taxed on ‘rateable value’ xxx

Plus:
[Cost of purchasing accommodation less £75,000] xx
x official rate of interest

Less:
Rent paid by employee (xx)
xxx
 Living accommodation-
example

Employee is provided with the use of a flat which cost the

employer £200,000. Rateable value is £3,000. Employee
pays rent of £2,000pa.

Official rate of interest is 2.5%

Living accommodation

Rateable value £3,000

2.5% x [£200,000-£75,000] 3,125
6,125
Rent paid by employee (2,000)
Taxable benefit 4,125
 ASSETS LOANED TO EMPLOYEE
• Taxable benefit computed as 20% of market
value on date asset is made available

• If asset sold/given to employee, employee

taxed on greater of

- MV of asset when sold, less employee

payment

- MV of asset when first made available,

less amounts taxed already, less
employee payment
COMPANY CARS

• Exempt if no private use

• Benefit based on list price of car when new
• Benefit is %age of this, based on CO2 emissions
– 16% for cars with emissions from 0 to 50g/km
– 19% for cars with emissions from 51g/km up to 75g/km
– 22% for cars with emissions from 76g/km to 94g/km
– 23% for 95g/km
– 1% increase for each additional 5g/km so 99 is still 23% but 101 goes
up to 24%]
– Max 37%
If diesel add 4%
[There is also a van benefit in kind - £3,430]
FUEL FOR PRIVATE USE

• Same percentage as for car benefit

• Multiplied by £24,100.
• Reduced to zero if the cost of all private use fuel is
reimbursed to the employer
• Check if worthwhile to receive fuel for private
motoring
• https://comcar.co.uk/fuel/benefit/

Slide 26 15/12/2019
TAX-FREE BENEFITS
examples

• Trivial benefits up to £50 (if it exceeds £50, full

amount is taxable).
• Reasonable removal expenses, up to £8,000

• Long-service awards

• Staff suggestion scheme

• Training

• Childcare/sport

• Free or subsidised canteen if available to all

• Staff party of £150 or less per person per year

• Work place parking and electric charging point

• Mobile phone (only 1)

• Approved mileage allowances for business travel

SHARE INCENTIVE PLANS

• Free shares worth up to £3,600 a year

- No IT or NIC provided shares retained for at least
5 years
• Up to £1,800 of pre-tax salary can purchase
‘partnership shares’
• Up to two free matching shares for each partnership
share
• IT & NIC if shares leave plan within 5 years
• Any increase in value while shares are in the plan
are exempt from CGT
APPROVED SHARE OPTION
SCHEMES

• In general, there is an income tax and NIC liability

if an employee share option is exercised.
• The charge is based on the difference between the
market value of the shares acquired and the
exercise price.
• Approved schemes avoid this charge. Instead, total
profit subject to CGT when the shares are sold
- Savings-related share option scheme
- Company share option plans
- Enterprise management incentive scheme
 LECTURE ACTIVITY 2

1. What is the basic rule on the taxation of benefits?

Cost to the employer

2. Is this full cost, opportunity cost or marginal cost?

Marginal cost
 LECTURE ACTIVITY 2

A private school has 100 pupils. Fixed overheads

are £100,000. Variable overheads are £600 per pupil.
The capacity of the school is 120. A schoolmaster
employed by the school pays £200 a year for his
son Henry’s education. Fees charged to other
parents are £3,000.

How much is the taxable benefit?

The taxable benefit is £600 - £200 = £400

REIMBURSED EXPENSES

• Any reimbursement of expenses by the employer to

the employee for business purposes does not have
any impact on the employee’s tax position e.g.
reimbursement of taxi fare for travel from office to
client.
• However, if the employer reimburses personal
expenses it is treated as taxable income e.g.
reimbursing travel costs from home to office.

Slide 32 15/12/2019
EXPENSES ALLOWABLE

Subscriptions to Travel and

relevant subsistence
professional necessarily
bodies incurred in
performing work

Other expenses
incurred wholly,
exclusively, and
necessarily in the
performance of
duties
EXPENSES ALLOWABLE

• Costs of travelling from home to work are

not normally allowable
• The following are allowable
- Travel from home to a site if the employee
has no normal place of work
- Business travel if the employee starts from
home
- Travel to a temporary place of work
Mileage allowances

• If an employees receives a mileage allowance for the use of

their own car for business travel, the allowance is tax-free up
to the following amounts:
– First 10,000 miles in the tax year: 45p a mile
– Each mile over 10,000 miles: 25p per mile
• If the employer pays more than the approved amount, the
excess is taxable
• If the employer pays less than the approved amount, the
deficit is treated as an allowable expense in computing
taxable income
• There are also allowances for the use of motor cycles and
bicycles.
Slide 35 15/12/2019
CASES

Ricketts v Colquhoun
Brown v Bullock

Fitzpatrick v IRC
PENSION CONTRIBUTIONS

Employee Employer
contributions contributions

Paid net of basic Not taxed on

rate tax employee

Extend basic rate

band by gross
payment
(same as Gift Aid)
 LECTURE ACTIVITY 3

1. What conditions must be satisfied in order to claim a

deduction for travelling expenses?

Necessarily incurred in the performance of duties.

2. What is the maximum percentage of income which

an employee can contribute to an approved
company pension scheme?

100% (can put more in, but no tax relief)

Child benefit

• Child benefit is exempt from tax

• However, if the recipient’s income is more than £50,000 a ‘high income
child benefit charge’ applies which effectively withdraws the child benefit
• The charge is 1% of the child benefit for each £100 of income between
£50,000 and £60,000
• For taxpayers with income of more than £60,000 the charge is 100% of
the child benefit
– they can elect not to receive the child benefit in order to avoid filing a tax return

Slide 39 15/12/2019