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8
Tax and employment
In this section we consider some of the most important tax issues for employers and employees.
Is your tax code correct?
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’ of the Marriage Allowance
M
– taxpayers who are ‘recipients’ of the Marriage 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.
If you are resident in Scotland you will pay Scottish income
tax. In such cases your code will start with an ‘S’ to tell your
employer to deduct tax using the Scottish income tax bands on
your pay.
Dynamic coding
HMRC has now started using information received from
employers, such as notification of a new benefit to recalculate
employee tax codes in real-time. Where a potential
underpayment is identified HMRC will make an in-year
adjustment to the code for the current tax year, so-called
'dynamic coding', rather than waiting until the following tax
year to code out the difference.
Employer loans
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 (2.5% from 6 April 2017). Contact us for the latest
position.
Expense payments
Expense payments are generally exempt and do not need to be
reported to HMRC on a form P11D. However, expense payments
can 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
• Optional Remuneration Arrangements (OpRAs)
• Share incentive arrangements
• Trivial benefits in kind (worth no more than £50 each)
• Choice of a company car
• 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.