Chapter 4 - Employment income

Question 1

Define employment income

Answer 1

Employment income includes income arising from an employment and the income of an office holder such as a director.

Question 2

What are the two types of employment income?

Answer 2

There are two types of employment income:

1. General earnings
2. Specific employment income (not in your syllabus)

Question 3

Define general earnings.

Answer 3

Any salary, wages or fee, any gratuity or other profit or incidental benefit of any kind obtained by an employee consisting of money or money’s worth, and anything else constituting an emolument of the employment, together with anything treated under any statutory provision as earnings (eg, benefits).

Question 4

What is the basis for assessment for general earnings?

Answer 4

The basis of assessment of general earnings is the receipts basis.

This means that the actual amounts received between 6 April 2019 and 5 April 2020 are taxable in 2019/20.

Question 5

When are general earnings treated as received?

Answer 5

General earnings consisting of money are treated as received on the earlier of:

1. the time when payment is made
2. the time when a person becomes entitled to payment

Question 6

When do benefits become taxable?

Answer 6

General earnings not in the form of money (ie, benefits) are taxable when they are received by the employee.

Question 7

What is meant by the benefits code?

Answer 7

Taxable benefits are set down in legislation called the benefits code.

Question 8

Give seven examples of taxable benefits.

Answer 8

Vouchers

Living accommodation

Expenses connected with the provision of living accommodation

Cars and fuel provided for private use

Vans provided for private use

Assets made available for private use

Any other non-monetary benefit provided by reason of the employment

Question 9

How can taxable benefits be reduced to nil?

Answer 9

Taxable benefits can be reduced to nil if the employee pays the full monetary value of the benefit to the employer on or before 6 July following the tax year.

Question 10

Under what condition is living accommodation not taxable?

Answer 10

Employees are taxable on the provision of living accommodation unless it is ‘job related accommodation’.

Question 11

Define job related accommodation.

Answer 11

Accommodation is job related if:

(a) the accommodation is necessary for the proper performance of the employee’s duties (eg, caretaker); or
(b) the accommodation is provided for the better performance of the employee’s duties and the employment is of a kind in which it is customary for accommodation to be provided (eg, police officers); or
(c) the accommodation is provided as part of arrangements in force because of a special threat to the employee’s security (eg, members of the government).

A director can only claim one of the first two exemptions if they own 5% or less of the shares in the employer company and either they are a full-time working director or the company is non-profit making or is a charity.

Question 12

What is the treatment when the living accommodation is owned by the employer?

Answer 12

If the living accommodation is owned by the employer, the amount of the benefit is the rent that would have been paid if it had been let at its annual value (taken to be the rateable value).

Question 13

What is the treatment when the living accommodation is rented by the employer?

Answer 13

If the living accommodation is rented by the employer, the amount of the benefit is the higher of the annual value and the rent actually paid by the employer.

Question 14

Define expensive accommodation.

Answer 14

Expensive accommodation is purchased accommodation which cost the employer more than £75,000 to provide.

Question 15

With regards to expensive accommodation, how is the additional benefit calculated?

Answer 15

The amount of the additional benefit is calculated as:

(Cost of providing the living accommodation less £75,000) x the official rate of interest at the start of the tax year

Question 16

What happens when the accommodation benefit is only available for part of the year?

Answer 16

If the accommodation is only available for part of the tax year, the benefit is time apportioned

Question 17

What happens when a property is acquired by an employer more than 6 years ago?

Answer 17

If the property was acquired by the employer more than six years before it is first provided to the employee, use the market value of the property when it was first provided plus the cost of subsequent improvements to calculate the additional charge, instead of the original cost plus improvements.

However, unless the original cost plus improvements exceeds £75,000, the additional charge cannot be imposed, however high the market value.

Question 18

What is the treatment for expenses connected with the provision of living expenses?

Answer 18

In addition to the living accommodation benefits described above, employees are also taxed on related expenses paid by the employer such as:

• Heat and lighting
• Council tax and water
• Cleaning, repairs, maintenance and decoration

The taxable benefit in each case is the cost to employer less any employee contribution.

Question 19

What happens when an employee is also provided with furnished living accommodation?

Answer 19

Where an employee is provided with furnished living accommodation, the employee will also have a taxable benefit for the private use of the furniture provided by their employer

Question 20

What are the taxable benefits for cars provided for private use based on CO2 emission thresholds?

Answer 20

For cars with CO2 emissions between 0 g/km and 50 g/km inclusive, the percentage is 16%.

For cars with CO2 emissions between 51 g/km and 75 g/km inclusive, the percentage is 19%.

For cars with CO2 emissions between 76 g/km and 94g/km inclusive, the percentage is 22%.

For cars with CO2 emissions of 95 g/km, the relevant threshold for the year, the percentage is 23%/

For every 5 g/km over the 95 g/km threshold (rounded down to the nearest 5 g/km), an additional 1% is added, up to a maximum of 37%.

Question 21

What happens when a car uses diesel instead of petrol?

Answer 21

Where the car uses diesel instead of petrol, the percentage is increased by a 4% supplement, subject to the overall maximum of 37%.

Question 22

Which cars are exempt from the diesel supplement?

Answer 22

However, cars that meet the Real Driving Emissions Step 2 (RDE2, also known as Euro 6d) standard are exempt from the diesel supplement.

Question 23

Is there a separate charge for the provision of fuel by the employer for private use?

Answer 23

Yes.

There is a separate charge for the provision by the employer of fuel for private use for a car provided by the employer with private use.

The benefit uses the same percentage calculated for the car benefit.

This is then applied to a fixed amount which is £24,100 in 2019/20.

Question 24

Is there a reduction in the benefit if the employee makes partial contributions to the fuel for private use?

Answer 24

There is no reduction in the benefit if the employee makes a partial contribution to the cost of private fuel.

There is a full fuel benefit unless the employee reimburses the employer for all private fuel provided.

Question 25

What are the benefits regarding vans for private use?

Answer 25

The benefit is an annual amount of £3,430. The taxable benefit on the provision of a van for private use where the van has zero CO2 emissions is £2,058 for 2019/20.

Question 26

What are the benefits regarding fuel for vans for private use?

Answer 26

There is a separate charge for the provision by the employer of fuel for private use of the van. The benefit is an annual amount of £655.

Question 27

Regarding assets available for private use, what is the amount if taxable benefits?

Answer 27

The amount of the taxable benefit is the higher of the annual value of the asset or any rent or hire charge payable by the employer. In both cases, any expenses relating to the provision of the asset are also added to the taxable benefit.

Question 28

What is the annual value of assets provided for private use?

Answer 28

The annual value is 20% of the market value of the asset when first provided for private use to any employee.

Question 29

What is the treatment regarding other benefits?

Answer 29

If an employee (or member of the employee's family or household) receives any other non-monetary benefit by reason of employment and there is no specific provision covering this type of benefit in the benefits code, the taxable benefit is the cost to the employer of providing the benefit less any amount paid by the employee for the benefit. Where benefits are provided in-house, the cost of the benefit is the marginal cost.

Question 30

What are some examples of exempt benefits?

Answer 30

Contributions by an employer to a registered pension scheme A trivial benefit ie, a benefit costing less than £50 to provide, which is not cash or a cash voucher, and which is provided for a non-work reason eg, a birthday or social event. There is an annual cap of £300 in respect of such benefits when provided to certain directors. Pension advice and associated tax planning available to all employees up to £500 per tax year (above which the full amount is taxable) One mobile telephone (including smartphones) available for private use by an employee, including all calls Free or subsidised meals in a canteen where such meals are available to all staff Social events paid for by the employer up to £150 per head per tax year Entertainment provided by a third party (eg, seats at sporting/cultural events) Non-cash gifts from third parties up to £250 per tax year from the same donor Provision of a parking space at or near the employee's place of work Awards of up to £5,000 made under a staff suggestion scheme Work-related training courses Sports and recreation facilities available to employees generally but not to the general public Childcare facilities run by or on behalf of an employer Payments towards the additional costs of an employee working from home (up to £4 per week without supporting evidence, payments in excess of £4 per week require documentary evidence that the payment is wholly in respect of such additional costs) Personal incidental expenses (eg, cost of telephone calls home) while the employee is required to stay away overnight on business up to £5 per night in the UK, £10 per night abroad. If reimbursement by the employer exceeds these daily limits the total amount reimbursed is taxable. Works buses and subsidies for employees to use public bus services Travel expenses when public transport disrupted, late night journeys and where car sharing arrangements break down Use of bicycles or cyclists safety equipment if made available to all employees Reasonable removal expenses (maximum £8,000) paid for by an employer for a new employment position or on relocation Non-cash long service awards in respect of at least 20 years service, not exceeding £50 per year of service Eye tests required under health and safety legislation and specially prescribed glasses provided for employees who use VDU equipment Health-screening assessment or medical check up provided for an employee, by the employer (maximum of one of each per tax year) Up to £500 pa for recommended medical treatment to assist with a return to work Vehicle battery charging facilities at or near the place of work where the vehicle is used by the employee and the vehicle is not a taxable car or van

Question 31

What is the aim of the PAYE system?

Answer 31

The aim of the PAYE system is to ensure that the correct amounts of income tax and national insurance contributions are paid on cash payments to employees.

Question 32

When should Income tax and national insurance contributions deducted under the PAYE system be paid?

Answer 32

Income tax and national insurance contributions deducted under the PAYE system must usually be paid to HMRC 14 days after the end of the 'tax month' to which they relate. The tax month runs from the 6th day of one month to the following 5th day of the next month. Therefore, payment is required by the 19th of each calendar month.

Question 33

What is the treatment when PAYE payments are made electronically?

Answer 33

Large employers (more than 250 employees) must pay electronically. Any other employer can pay electronically by choice. If payment is made electronically the payment deadline is extended to the 22nd of each calendar month.

Question 34

When can PAYE payments be made quarterly instead of monthly?

Answer 34

Payments can be made quarterly instead of monthly where the average monthly total of the PAYE income tax and national insurance contributions does not exceed £1,500.

Question 35

When is letter L used when computing a tax code?

Answer 35

If total allowances less total deductions gives a positive figure, the tax code is created by removing the last digit in the computation and adding a letter at the end. This is usually the letter L showing that the employee is entitled to the basic personal allowance.

Question 36

When will the letter for the tax code be N or M?

Answer 36

If a marriage allowance election is made, and there is a deemed transfer of part of the personal allowance (£1,250) from one spouse to the other, for tax code purposes the personal allowances effectively become £11,250 and £13,750 respectively, and the letter for the tax code will be N or M respectively.

Question 37

When will the letter for the tax code be K?

Answer 37

If total allowances less total deductions give a negative figure, the tax code will have a letter K at the beginning. The application of a K code will mean that the taxable pay of the employee will be increased rather than decreased. A K code is calculated in the same way as other codes except that the code is decreased by 1. A K code may arise if large benefits are taken into account in the PAYE code.

Question 38

Can the code number in a tax code reflect unpaid tax from income from previous years?

Answer 38

Yes. The code number can also reflect unpaid tax on income from earlier years. In this case, gross up the unpaid tax using the taxpayer's estimated marginal rate of income tax (for example, multiply by 100/20 for a basic rate taxpayer) and deduct the grossed up unpaid tax from total allowances.