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11
Tax and employment
This section covers some of the key tax issues for employers and employees.
The right PAYE code
The aim 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 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, 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
Y
– includes the full personal allowance for those born on
5 April 1938 and earlier (assumes income less than £27,700)
T
– there is usually an adjustment in your code which requires
manual checking by HMRC each year – for example, you might
be older, with income over the limit for the full higher rate of
personal allowance and therefore your allowance needs 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 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.
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
Your employer is required to report expenses 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.
This arduous 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 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
• 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