Tax and employment
Making sure your PAYE code is correct
The PAYE system 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.
However, many people can go for years paying the wrong amount of tax - either too much or, perhaps more worryingly, too little - because they have an incorrect tax code. 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 losing the benefit of a company car, or they may have started investing in a personal pension plan.
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 which code is currently being applied.
The letter in 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 the basic personal allowance
P includes the full higher rate personal allowance for age 65-74 (assumes income less than £25,400)
Y includes the full personal allowance for age 75 or over (assumes income less than £25,400)
T there is usually an adjustment in your code which requires manual checking by HMRC each year - for example, you might be over 65 with income over the limit for the full higher rate of personal allowance and therefore your allowance has to be re-calculated every time the rates and limits change.
K HMRC may try to increase the tax you pay on one source of income to cover the tax due on another source which cannot be taxed directly - for example, the tax due on your taxable employment benefits might be collected through increasing the tax you would otherwise pay on your company salary. A K code applies when the 'other income' adjustment reduces your allowances to less than zero - in effect, it means that the payer has to add notional income to your real income for PAYE purposes. The maximum tax which can be deducted using a K code is 50% of the source income.
HMRC will often try to collect tax on other income through your PAYE code but you may prefer to pay the tax through self assessment - we can arrange for the adjustment to be removed.
Where loans from an employer total more than £5,000 at any point during the tax year, tax is chargeable on the difference between any interest actually paid and interest calculated at the official rate (4%).
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 should provide you with a copy of your 2012/13 P11D no later than 6 July 2013.
This laborious process of reporting and claiming 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 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 during an employer compliance visit from HMRC.
You may be able to claim tax relief for other expenses you incur in connection with your job, but the rules are fairly restrictive.
An attractive remuneration package can include any of the following:
- Bonus schemes and performance-related pay
- Reimbursement of expenses
- More generous expenses - business travel in first or business class, or a better quality hotel on business trips
- Pension provision
- Life assurance and/or healthcare
- Mobile phone, including smartphones, such as iPhones and BlackBerrys
- Salary sacrifice options
- Share incentive arrangements
- 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 including, for example, an annual function costing not more than £150 (including VAT) per head, or long service awards.
Although most benefits are fully taxable, some attract specific tax breaks. Combining benefits with a properly arranged salary sacrifice can mean substantial savings for both employer and employee.
Getting the package right can be very beneficial - especially for those with income of more than £100,000 who will lose their personal allowances. Talk to us if you fall into this marginal category.
Travel and subsistence claims
Site-based employees may be 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.
Employees working away from their normal place of work can claim a deduction for the cost of travel to and from their temporary place of work, subject to a maximum period.
|Approved business mileage rates|
First 10,000 miles
|Car / van||
Pension scheme contributions
Employer contributions to a registered employer pension scheme or your own personal pension policies are not liable for tax or NICs.
You should be aware that while your employer can contribute to your personal pension scheme, these contributions are combined with your own for the purpose of measuring your total pension input against the annual allowance (£50,000 for 2012/13). Further information is provided in this guide.
Considering a company car
The company car continues to be an important part of the remuneration package for many employees, despite the increases in the taxable benefit rates over the last few years.
Employees and directors pay tax on the provision of the car and on the provision of fuel by employers for private mileage.
Employers pay Class 1A NICs at 13.8% on the same amount.
This is payable by the 19 July following the end of the tax year.
The amount on which tax and Class 1A NICs are paid in respect of a company car depends on a number of factors. Essentially, the amount charged is calculated by multiplying the list price of the car, including most accessories, by a percentage. The percentage is set by reference to the rate at which the car emits carbon dioxide (CO2) - see table below.
The reductions of emissions-based percentages for cars that can be driven on alternative fuels came to an end on 5 April 2011. However, for cars which cannot produce CO2 emissions in any circumstances when driven, the percentage is set at 0%.
Some employers find it convenient to have one or more cars that are readily available for business use by a number of employees. The cars are not allocated to any one employee and are only available for genuine business use. Such cars are usually known as pooled cars. HMRC's definition of a pooled car is very strict, but if a car qualifies there is no tax or NIC liability.
The above rates are subject to change; please check with us for any subsequent rate changes.
|Car – fuel only advisory rates|
|1400cc or less||
|1401 - 2000cc||
|1600cc or less||
|1601 - 2000cc||
Rates from 1 March 2013 and are subject to change. Note the advisory fuel rates are revised in March, June, September and December. Please contact us for any updated rates.
Mileage allowance versus free fuel
Am I better off giving up the company car and instead claiming mileage allowance for the business travel I do in a car that I buy myself? The rule of thumb answer is that you are more likely to be better off if your annual business mileage is high.
Am I better off having my employer provide me with fuel for private journeys, free of charge, and paying tax on the benefit, or bearing the cost myself? The rule of thumb answer is that you are only likely to be better off taking the free fuel if your annual private mileage is high.
Every case should be looked at on its own merits, and considered from the point of view of both the employee and the employer. And cost is not the only factor. As an employee, it might cost you more to have a company car, but you do not have to worry about bills or the cost of replacement. As an employer running company cars, it might be more expensive, but you retain control over what may, for your business, be key operating assets.
Fuel for private mileage
If your employer provides fuel for any private travel, there is a taxable benefit, calculated by multiplying the fuel benefit multiplier of £20,200, by the same percentage.
You can avoid the car fuel charge either by paying for all fuel yourself and claiming the cost of fuel for business journeys at HMRC's fuel only advisory rates, or by reimbursing your employer for fuel used privately using the same rates.
Many people have seen significant savings for both employer and employee in replacing company cars with employee-owned cars part-funded by mileage allowances at HMRC rates. Where a company vehicle is still appropriate, a 'van' rather than a car is worth considering. (Why the inverted commas? You might be pleasantly surprised by some of the vehicles that qualify as 'vans'!)
Unlimited use of a company van results in a taxable benefit of £3,000, with a further £550 benefit if free fuel is also provided. The resulting tax bill can be up to £1,775, with an NIC bill for the employer of £490. Restricting the employee's private use to only
home to work travel could mean that both figures reduce to zero.
Case Study 5
Sandra is an owner-director. For her company car she had chosen one with a list price of £25,785. The car runs on petrol and emits CO2 at a rate of 148 g/km.
Sandra's company is successful and she pays tax at 50%. Her 2012/13 tax bill on the car is therefore £2,578 (£25,785 x 20% x 50%). Sandra's company will pay Class 1A NICs of £712 (£25,785 x 20% x 13.8%).
The company also pays for all of Sandra's petrol. Because Sandra does not reimburse the cost of fuel for private journeys, she will pay tax of £2,020 (£20,200 x 20% x 50%) and the company will pay Class 1A NICs of £557 (£20,200 x 20% x 13.8%).
£5,867 is the total tax and NIC cost.
Furthermore, although the company is paying for the fuel, the company will also need to pay a gross amount of over £9,579 to provide Sandra with the funds to pay the tax.
When employers' national insurance is taken into account, the gross cost before tax relief of funding Sandra's tax and the NIC liabilities will be over £12,170.
For 2013/14 - The lowest appropriate percentages will remain at 0% and 5%. The 10% rate will apply to cars with CO2 emissions of 76 g/km to 94 g/km. The appropriate percentage will increase by 1% for all vehicles with CO2 emissions between 95 g/km and 215 g/km, to a maximum of 35%.
For 2015/16 - The appropriate percentage for zero emission cars reverts to 13% from 6 April 2015.
The special rules for cars with CO2 emissions not exceeding exactly 75 g/km will be abolished.
For 2016/17 - The 3% diesel supplement differential will be abolished so that diesel cars will be subject to the same level of tax as petrol cars.
Follow-up - Contact us about…
Checking your PAYE code
- Putting together an attractive and tax-efficient remuneration package
- Reducing the cost of company cars, and reviewing the alternatives
- Minimising NIC costs and understanding the tax costs of company cars