Tax and employment
|Areas where our advice solves problems and adds value|
- Cheap or interest free loans
- Your remuneration package
- Expense payments
- Travel and subsidence
- Performance related pay
- Payslip calculator
- Car benefit calculator
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.
Is your PAYE code correct?
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 for those born after 5 April 1948
- P indicates that the employee is entitled to the lower single age allowance, i.e. an employee born between 6 April 1938 and 5 April 1948
- Y indicates that the employee is entitled to the higher single allowance, ie - an employee born before 6 April 1938
- T means that your code requires manual checking by HMRC 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 40% 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 (40%)
D1: This is used when all your income is taxed at the additional rate of tax (45%)
NT: This is used when no tax is to be deducted from your income or pension
New category letters
If you employ someone aged over 16 but under 21 you'll have to choose 1 of the 7 new National Insurance categories when assessing their secondary National Insurance contributions. It's the employer's responsibility to ensure the correct category letter has been applied based on the age and circumstances of the employee. The 7 categories are:
- M - not contracted-out standard rate contributions
- Z - not contracted-out deferred rate contributions
- Y - mariners not contracted-out standard rate contributions
- P - mariners not contracted-out deferred rate contributions
- V - mariners contracted-out salary related contributions
- I - contracted-out salary related standard rate contributions
- K - contracted-out salary related deferred rate contributions
Three of the new letters (V, I and K) will be removed in April 2016 in line with the ending of 'contracted-out' status in relation to salary-related occupational pension schemes.
Use our Payslip Calculator to check your payslip.
Cheap or interest-free loans
Where loans from an employer total more than £10,000 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 3.25%).
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
- Pension provision
- 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
- Mobile phone
- Contributions to the additional costs of working at home
- Other benefits in kind including, for example, annual parties costing not more than £150 per head for the year, 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 HMRC 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 2015/16 P11D by no later than 6 July 2016.
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 HMRC 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 HMRC 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 personal expenses incurred while away from home such as newspapers and laundry that may not otherwise be allowable. Employees must not charge the expenses in tehir hotel bills in addition to the fixed rate allowance.
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 £40,000. 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.
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.