Tax and employment
At McEwan Wallace we can help employers with a variety of tax and employment matters. From PAYE to business motoring, we would be happy to advise you in any way we can.
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 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. 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’.
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.
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 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.
Salary Sacrifice and Optional Remuneration Arrangements (OpRAs)
Transitional rules have been introduced where BIK have been offered through salary sacrifice or OpRAs, such that an income tax and NIC charge will arise on the higher of the salary sacrificed (or cash option) and the value of the BIK taken. What the benefit is will determine when the rules change. By taking the BIK, the only saving made will be in employee NICs. From 6 April 2021, all BIK are covered by these rules except for employer pension contributions; childcare provided in workplace nurseries and Employer Supported Childcare (usually by way of childcare vouchers); cycle to work schemes; and ultra-low emission cars.
Contributing to a pension scheme
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’.
Travel and subsistence costs
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
||First 10,000 miles
The company car
The company car continues to be an important part of the remuneration package for many employees, despite the rises 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 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 2021/22. The table is divided into two columns for cars registered up to 5 April 2020 and those registered after that date. The table reflects the differences between the new Worldwide harmonised Light vehicle Test Procedure (WLTP) and the New European Driving Cycle (NEDC) test it is replacing.
In addition, the government has reduced the percentages which apply to lower emissions cars and introduced new performance-related bands for hybrid vehicles with emissions up to 50 g/km depending on how far the hybrid vehicle can travel under electric power.
||Cars registered after 5.4.20
||Cars registered before 6.4.20
|CO2 emissions (g/km)
||% of list price taxed
||% of list price taxed
|1 – 50
|51 – 54
|55 – 59
|60 – 64
|65 - 69
|70 - 74
|75 - 79
|80 - 84
|85 - 89
|90 - 94
For every additional 5g thereafter add 1% until the maximum percentage of 37% is reached.
For fully diesel cars generally add a 4% supplement (unless the car is registered on or after 1 September 2017 and meets the Euro 6d emissions standard) but the maximum is still 37%. For emissions over 75g/km if the CO2 figure does not end in a 5 or a 0 round down to the nearest 5 or 0.
Car - fuel-only advisory rates
|Rate per mile
||Rate per mile
||Rate per mile
|1400cc or less
|1401 – 1600cc
|1601 – 2000cc
Rates from 1 December 2021 and are subject to change. Note the advisory fuel rates are revised in March, June, September and December. In addition, a rate of 4 pence per mile can be paid to electric-only company car drivers.
Pooling your resources
Some employers find it convenient to have one or more cars that are readily available for business use by a number of employees. The cars are only available for genuine business use and are not allocated to any one employee. Such cars are usually known as pool cars. The definition of a pool car is very restrictive, but if a car qualifies there is no tax or NIC liability.
Mileage allowance vs free fuel
A frequently asked question is: would I be better off giving up the company car and instead claiming mileage allowance for the business travel I do in my own car? In most cases, you are more likely to be better off if your annual business mileage is high.
Another frequent question is: would I be better off having my employer provide me with fuel for private journeys, free of charge, and paying tax on the benefit, or bearing the cost myself? In this case, you are only likely to be better off taking the free fuel if your annual private mileage is high. However, the cost to the employer of providing this benefit is likely to be high.
Every case should be judged on its own merits, and considered from both the employee’s and the employer’s point of view.
Fuel for private travel
If your employer provides fuel for any private travel, there is a taxable benefit, calculated by applying the same percentage used to calculate the car benefit to the fuel benefit charge multiplier of £24,600. You can avoid the car fuel charge either by paying for all fuel yourself and claiming the cost of fuel for business journeys at HMRC’s fuel-only advisory rates, or by reimbursing your employer for fuel used privately using the same rates.
Considering a company van
Where a company vehicle is still appropriate, it is worth considering a van as opposed to a car. Unrestricted use of a company van results in a taxable benefit of £3,500, with a further £669 benefit if free fuel is also provided. Limiting the employee’s private use to only home-to-work travel could reduce both figures to zero.
Considering a company car
Hailey is an owner-director. Her company car (registered before 6 April 2020) has a list price of £25,785. The car runs on petrol and emits CO2 at a rate of 93g/km.
Hailey pays tax at 45% and her 2021/22 tax bill on the car is therefore £2,669 (£25,785 × 23% × 45%). Hailey’s company will pay Class 1A NICs of £818 (£25,785 × 23% × 13.8%).
The company also pays for all of Hailey’s petrol. Because she does not reimburse the cost of fuel for private journeys, she will pay tax of £2,546 (£24,600 × 23% × 45%) and the company will pay Class 1A NICs of £781 (£24,600 × 23% × 13.8%). The total tax and NIC cost is £6,814.
In 2017, the government introduced a tax incentive for childcare, Tax-Free Childcare (TFC). Under TFC, the tax relief available is 20% of the costs of childcare, up to a total of childcare costs of £10,000 per child per year. The scheme will therefore be worth a maximum of £2,000 per child £4,000 for a disabled child). Parents are able to apply for TFC for children under 12 (up to 17 for children with disabilities).
To qualify for TFC all parents in the household must generally meet a minimum income level, based on working 16 hours a week (generally £142 a week) and each earn less than £100,000 a year and not already be receiving support through Tax Credits or Universal Credit.
Your next steps: contact us to discuss…
- PAYE and payroll issues
- Ensuring you have the correct PAYE code
- Putting together an attractive and tax-efficient remuneration package
- Cutting the cost of company cars and reviewing the alternatives
- Minimising NIC costs and understanding the tax implications of company cars
If you would like advice on tax planning strategies for your business, including tax and employment issues, please contact McEwan Wallace.