Tax and the Employee

Few avoid working for others at some time in their life and most will have encountered the PAYE system operated by employers to collect the income tax and national insurance contributions (NICs) due on wages and salaries.

The tax code

Ensuring the right amount of tax is taken relies on a PAYE code, issued by HMRC and based on information given in a previous self assessment return or suppliedby the employer. The employee, not the employer, is responsible for the accuracy of the code.

Code numbers try to reflect both an individual’s tax allowances and reliefs and also any tax they may owe on employment benefits and in some cases other types of income. For many employees things are simple. They will have a set salary or wage and only a basic personal allowance. Their code number will be 1185L and the right amount of tax should be paid under PAYE. However, for those who are provided with employment benefits the code number is generally adjusted to collect the tax due so that there are no nasty underpayment surprises. HMRC may also try to collect tax on untaxed income, tax on dividends and tax owing for an earlier year.

For Scottish taxpayers a letter ‘S’ is included in the tax code and denotes that the Scottish income tax rates apply to an employee’s pay, rather than the rates and bands which apply across the rest of the United Kingdom (see the Taxation of the Family section of this guide for details of rates and bands).

With so many complications and some guesswork involved, getting the code exactly right can be difficult and the right amount of tax will not always be deducted.

Tax Tip

If you are unsure about your code and are anxious not to end the tax year under or overpaid, then you should have it checked. HMRC may update an individual’s tax code during the tax year to reflect changes to benefits and to collect tax underpayments. Please talk to us about getting your tax code checked.

Benefits

The range of benefits available will vary significantly depending on the type of employment. Some attract no tax but even taxable benefits can be efficient as the benefit obtained by the individual can often outweigh the tax cost arising. In addition, for the individual (but not the employer) benefits generally do not attract NICs.

Valuation

New rules were introduced from April 2017 which may affect the value of a benefit. Where a benefit is taken rather than an alternative cash option, the taxable value of the benefit is the higher of the cash foregone or the taxable value under the normal benefits rules. Transitional provisions apply for arrangements entered into before 6 April 2017.

Company cars

Employer provided cars, commonly known as company cars, remain a popular benefit and for some a real status symbol, despite continued increases in the tax charge they give rise to.

The charge on cars is generally calculated by multiplying the list price of the car by a percentage which depends on the CO2 emissions (recorded on the Vehicle Registration Document) of the car. You then pay tax at 20%, 40% or 45% on this charge depending on your overall tax position. The tax rates applicable to Scottish taxpayers range from 19% to 46%.

The table below shows the percentages for 2018/19. For the majority of company car drivers using a petrol car the taxable benefit is 2% higher compared to the previous year.

If the car has a diesel engine the charge is generally increased by a further 4% supplement (except that it cannot exceed 37%) unless the car is registered on or after 1 September 2017 and meets the Euro 6d emissions standard. The diesel supplement has been increased from 3% to 4% from 6 April 2018.

2018/19

CO 2 emissions
(g/km)

% of car’s price taxed

0 to 50*

13

51 to 75*

16

76 to 94*

19

95

20

100

21

105

22

110

23

115

24

120

25

125

26

130

27

135

28

140

29

145

30

150

31

155

32

160

33

165

34

170

35

175

36

180 and above

37

round down except *

Example

Mark has an Audi A3 TDI (diesel) registered on 1 February 2017. It has an original list price of £20,155 and CO2 emissions of 99g/km. Mark had extras fitted to the car costing £1,000 (VAT inclusive). In 2018/19 the taxable benefit will be £5,077 ([20,155 + 1,000] x 24%*). If Mark is a 40% taxpayer the tax due on this will be £2,031.

* 20% from the table plus 4% diesel supplement.

Fuel for private use

A separate charge applies where private fuel is provided by the employer for a company car. The charge is calculated by applying the same percentage figure used to calculate the company car benefit to a fixed figure which for 2018/19 is set at £23,400. No fuel benefit applies to an electric car.

Tax Planning

The fuel benefit charge can be expensive. It may be cheaper for the employee to pay for all the fuel and to reclaim from the employer the cost of business miles driven in a company car based on a specific log of business journeys undertaken.

HMRC publish advisory fuel rates for company cars which are updated on a quarterly basis. See gov.uk/government/publications/advisory-fuel-rates for the latest position or contact us.

Planning to change your car?

Significant changes to the car benefit rules are taking place. The appropriate percentages of the list price subject to tax will generally increase by 3% for 2019/20 (but retaining the 37% maximum). In addition, the diesel supplement is now generally 4%.

Medical insurance

The employee is taxed on the amount of the premium paid by the employer.

Home and mobile phones

There is no benefit on the provision of a company mobile phone even where it is used privately. However, this is limited to one phone per employee.

Where home telephone bills are paid by the employer, the amount paid will be taxable. The employee may make a tax deduction claim for the cost of business calls only but not the line rental.

Cheap or interest free loans

If loans made by the employer to an employee exceed £10,000 at any point in a tax year, tax is chargeable on the difference between the interest paid and the interest due at an official rate - currently set at 2.5% per annum. An exception applies for certain qualifying loans - please contact us for information.

Tax Tip

The £10,000 limit on tax free loans is an attractive perk for many employees.

Childcare costs

Childcare costs paid for by an employer are exempt from both income tax and NICs. This applies to a place in an employer operated nursery or where the employer pays for registered or approved childcare as long as the scheme meets certain requirements. In the latter case the exemption is limited to a maximum of up to £55 per week depending on when the employee first receives employer supported childcare and their tax position. Any excess amounts are subject to tax and NICs. Employer supported childcare is now expected to close to new claimants from 4 October 2018. Employer supported childcare is being replaced with Tax-Free Childcare. See the Family Matters section of this guide for more information on Tax-Free Childcare.

Employees who qualify for both schemes are able to choose which scheme they wish to use but families cannot benefit from both schemes at the same time.

Pension Contributions

Contributions by an employer to a registered pension scheme are generally tax and NICs free for most employees. This may be far better than any other perk.

Tax Tip

You may want to sacrifice some of your ‘normal’ salary to do this. Please talk to us to make sure your salary sacrifice scheme is effective.

Expense payments

An employee can claim tax relief for expenses which are incurred wholly, exclusively and necessarily for business purposes. The main types of expense are travelling to places for work (but not the normal place of work) and overnight accommodation.

Reimbursed expenses

An employer would normally reimburse an employee for business expenses. Employers are no longer required to report reimbursed tax deductible business expenses and therefore employees do not need to claim tax relief on these expenses.

Mileage claims

Many employers pay a standard rate of mileage to all employees who use their own cars for business journeys. HMRC set statutory rates for business mileage which are 45p for the first 10,000 miles in a tax year and 25p thereafter.

If the employee is paid for business miles at less than the statutory rates, tax relief is available on the difference. If, however, the employee is paid at more than these rates then the excess is taxable.

If you are paid less than the statutory rates to use your own car for business purposes remember to claim a deduction on your return or write to HMRC to make your claim.

Example

In 2018/19 Michael travels 14,100 business miles in his own car and is paid 32p per mile by his employer.

Michael can claim tax relief on an additional amount of £1,013 ((10,000 x 45p) + (4,100 x 25p)) - (14,100 x 32p).

Vans

Where employees are provided with a van and the only private use of this is to travel to and from work (including any incidental private use), then no taxable benefit should arise. If there is private use beyond this, there is a benefit of £3,350 for 2018/19 and an additional £633 if fuel is provided for private as well as business journeys. In order to avoid this charge, it is advisable to have a formal written policy, detailed mileage logs and make use of vehicle tracker records. These will support the limited private use of the van and may avoid problems with HMRC in the future.