Tax and Employment
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 can 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 will lose their personal allowances. If you fall into this marginal category, please talk to us to find out how we can help.
Claiming deductions for travel and subsistence
Site-based employees may be able to claim a deduction for travel to and from the site at which they are working, plus subsistence costs when they stay at or near the site.
Employees working away from their normal place of work can claim a deduction for the cost of travel to and from their temporary place of work, subject to a maximum period.
Approved business mileage allowances - own vehicle
Approved business mileage allowances - own vehicle
Vehicle First 10,000 miles Thereafter
Car/van 45p 25p
Motorcycle 24p 24p
Bicycle 20p 20p
Pension scheme contributions
Employer contributions to a registered employer pension scheme or your own personal pension policies are not liable for tax or NICs.
Please be aware that while your employer can contribute to your personal pension scheme, these contributions are combined with your own for the purpose of measuring your total pension input against the 'annual allowance'. Further information is provided in this guide.
Company cars
The company car continues to be an important part of the remuneration package for many employees, despite the increases in the taxable benefit rates over the last few years.
Employees and directors pay tax on the provision of the car and on the provision of fuel by employers for private mileage. Employers pay Class 1A NICs at 13.8% on the same amount.
This is payable by the 19 July following the end of the tax year.
The amount on which tax and Class 1A NICs are paid in respect of a company car depends on a number of factors. Essentially, the amount charged is calculated by multiplying the list price of the car, including most accessories, by a percentage.
Finally to discuss if/how these and many other tax strategies can be used to help you reduce your tax liability, please Contact Us.
