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Tax and employment
In this section we consider some of the most important tax issues for both 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 employer uses your tax code – or sometimes a series
of tax codes – to work out how much tax to deduct from
your earnings.
However, if individuals have an incorrect tax code, they can go for years paying the wrong amount of tax – either too much or, perhaps more worryingly, too little. In particular, they may not have notified HMRC 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. Alternatively, they may have started or stopped investing in a personal pension plan.
Checking your PAYE code now is vital: it is much easier to rectify mistakes before the tax year ends. As a first step, you should look at your payslip to see which code is currently being applied.
The letter in the code tells you whether your code includes one of the standard allowances, and you can see if this is right for your circumstances. The letters are as follows:
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. For more information on this, please 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 rates and bands on your pay.
If you are resident in Wales you pay the Welsh rates of income tax. The codes for Welsh taxpayers begin with a ‘C’.
Dynamic coding
HMRC uses 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 makes 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 of 2%. Please 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:
• A 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 (BIK) (worth no more than £50 each)
• The 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.
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