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8
Tax and employment
In this section we look at some of the key tax issues for employers and employees.
Your PAYE code
The purpose of the PAYE system is to collect the right amount
of tax from your earnings throughout the course of the year.
Your tax code – or sometimes a series of tax codes – is used
by your employer to work out how much tax to deduct 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 a change in jobs or acquiring or losing the benefit of a
company car, or they may have started or stopped 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, you can look at your salary slip to 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
N
– taxpayers who are ‘transferors’ under the Transferable Tax
Allowance
M
– taxpayers who are ‘recipients’ under the Transferable Tax
Allowance
T
– there is usually an adjustment in your code which requires
manual checking by HMRC each year – for example, you might
have a tax underpayment being ‘coded out’
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 by increasing the
amount of 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 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 – contact us, as we can arrange for the adjustment
to be removed.
From April 2016, you will pay the Scottish rate of income tax if
you live in Scotland. In such cases your code will start with an S
to tell your employer to deduct tax at the Scottish rate.
Loans from an employer
Where loans from an employer total more than £10,000 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 (currently 3%).
Expense payments
Up until the 2015/16 tax year your employer is required to
report expense payments to HMRC using 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 2015/16 P11D no later than
6 July 2016.
From 6 April 2016 expense payments are exempt and no longer
need to be reported. Expense payments will still 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 might include any of
the following:
• Salary
• Bonus schemes and performance-related pay
• Reimbursement of expenses
• Pension provision
• Life assurance and/or healthcare
• A mobile phone
• Salary sacrifice options
• Share incentive arrangements
• Trivial benefits in kind (worth no more than £50 each)
• 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.
Most benefits are fully taxable, but some attract specific
tax breaks.
Combining benefits with a properly arranged salary sacrifice can
mean considerable savings for both employer and employee. If
you get the package right, it can be very beneficial – especially
for those with income of more than £100,000 who will lose
their personal allowances. If you fall into this marginal category,
please talk to us to find out how we can help.