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Employee Taxation

Tax rates and payment

Employment income is charged to both income tax (as ‘general’ income) and to Class 1 National Insurance Contributions. Tax and NIC are normally paid by the employer through the PAYE system, under which the ‘notice of coding’ makes adjustments for tax reliefs due and some tax due on other income. An employee who has overpaid or underpaid tax at the end of the year should complete a tax return and settle the liability as described in Personal Taxation, or claim a repayment.

If the tax underpaid is up to £3,000 and the 2014/15 tax return is submitted by 31 October 2015, or e-filed by 30 December 2015, the underpayment can be settled through PAYE for 2016/17 rather than being collected on 31 January 2016.

Class 1 NIC rates 2014/15

Employers and employees both contribute at rates dependent on the level of earnings during a weekly, monthly or annual earnings period.

 weekmonthyear
LEL: lower earnings limit £111 £481 £5,772
PT: primary threshold 153 663 7,956
ST: secondary threshold 153 663 7,956
UAP: upper accrual point 770 3,337 40,040
UEL: upper earnings limit 805 3,489 41,865

No NIC are payable by employee or employer on earnings up to the PT (employees) or ST (employer). These thresholds have been different for 3 years but are the same for 2014/15.

Earnings between the LEL and the PT must be reported by the employer, and the employee receives credit towards the State Pension, but no employee NIC are payable.

Rates of NIC on earnings above the PT/ST depend on whether the employee is within the State Second Pension or is 'contracted out' as a member of a salary-related pension scheme.

 

 EmployeeEmployer
 InOutInOut
PT/ST - UAP 12.0% 10.6% 13.8% 10.4%
UAP - UEL 12.0% 12.0% 13.8% 13.8%
Above UEL 2.0% 2.0% 13.8% 13.8%

A person with more than one employment can defer the payment of some employee NIC until after the end of the tax year. The total amount payable is then checked and limited so the full 12% rate is only applied to income between the PT and the UEL.

From 2014/15, there is a reduction in employer’s annual NIC of up to £2,000 in total for most employers, regardless of size. The employee’s NIC is unaffected.

Employee benefits

Employee benefits are usually valued at a ‘cash equivalent’ and are then charged to income tax on the employee and Class 1A NIC (at 13.8%) on the employer. The cash equivalent is generally based on the cost to the employer of providing the benefit, but the following are charged according to a statutory formula. Employee contributions for private use usually reduce the taxable amount.

Cars provided by the employer: a percentage of the original list price of the car, depending on the CO2 emissions rating of the car. Zero emission cars are not currently charged.

 2014/15
5% of list price 1-75g/km
11% of list price 76-94g/km
12% of list price 95g/km-99g/km
1% addition 100,105,110 etc.
max 35% benefit over 209g/km

For diesel cars add 3% (min. is 8%, max. still 35%, reached at 195g/km).

Fuel provided by the employer for private use in a company car is charged without reduction for contributions unless all private fuel is paid for by the employee, in which case there is no benefit.

To calculate the taxable amount, the percentage used to calculate car benefit is applied to a standard figure of £21,700.

Vans provided by the employer for an employee’s use are charged at a flat rate of £3,090. If fuel is provided as well, an additional £581 is charged. If private use of a van is restricted to home-to-work travel, there is no tax charge.

Use of other assets is charged at 20% of the original cost of the assets to the employer, or the value when first made available to the employee.

Loans of money that exceed £10,000 at any point in the tax year are charged on the excess of the official rate (3.25% from 6.4.2014) over any interest actually paid by the employee to the employer.

Main exempt benefits

Many employee benefits are not charged to tax. A full list cannot be given here, but some of the principal ones are:

  • electric car or van with no CO2 emissions
  • providing one mobile phone, even with private use
  • subsidised meals available to all employees in a staff restaurant or canteen (subject to conditions)
  • the provision of ‘green transport’ such as works buses or the use of a bicycle for commuting

Exempt mileage allowances: employee's own car

First 10,000 business milesExtra milesEach passenger
45p 25p 5p

Exempt fuel-only allowances: company car

The 45p mileage rate is for business use of an employee’s own car. Where the employer provides the car, allowances should not reflect costs already borne by the employer. HMRC publish advisory mileage rates which are accepted as covering the cost of fuel for different engine sizes and fuel types. They change four times a year, so the current rates have to be checked at www.hmrc.gov.uk/cars/fuel_company_cars.htm.

Other exempt payments to or for employees

  • mileage allowances of up to 24p per mile for business use of the employee's motorcycle or 20p per mile for a pedal cycle
  • pension contributions up to limit (see Investment Reliefs)
  • payments of up to £5 a night for 'incidental overnight expenses' when staying away (£10 if abroad)

Employee share schemes

Generally, employees are charged to income tax on the value of shares that they are given or issued by their employer, less any amount paid for the shares. This applies to ‘free shares’ and to shares acquired under option schemes. NIC are also charged if the company is quoted, or the shares can be easily sold.

If the employer operates one of the following 'tax-favoured' schemes, the tax charge may be eliminated, reduced or deferred.

Share incentive plans (SIP)

  • 'free shares' to £3,600pa; employee can buy up to £1,800pa with pre-tax pay; employer can match bought shares with up to 2 more (limits increased from £3,000/£1,500 on 6.4.2014)
  • shares left in the scheme for at least 5 years: no income tax or CGT on the value when they leave the scheme

Enterprise management incentives (EMI) - qualifying trading companies (fewer than 250 employees) can grant options to buy up to £250,000 worth of shares to selected employees. These shares may qualify for the lower 10% rate of CGT on disposal.

Approved company share option plans - share options to buy up to £30,000 of shares can be granted to employees.

Approved savings-related share option plans - employees contribute to a Save As You Earn plan (max. £500 a month, up from £250) to save the money needed to exercise options.

Employees pay CGT on sale of approved option shares, likely to be smaller and due later than IT/NIC on exercising normal options.

Employee shareholder status - worker gives up some employment rights in exchange for at least £2,000 of shares in the employer, with tax breaks.

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Directors:  Paul Cutter FCA | Kate Jones FCCA, ACA | Dave Hazlehurst FCCA, CTA

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