Working For Others

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 (NIC) 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 on returns supplied by the employer. The employee and not the employer is responsible for the accuracy of the code.

Code numbers try to reflect both your tax allowances and reliefs and also any tax you may owe on benefits in kind, on untaxed income or from an earlier year. The code may even try to allow for higher rate tax that has to be paid on investment income. As can be imagined, with this many complications, and some guess work involved, getting the code exactly right can be difficult and the right amount of tax will not always be taken.

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 503L and the right amount of tax will be paid over under PAYE.

Benefits in kind

Company cars

Company cars remain a potent benefit and for some a real status symbol, despite recent increases in the tax charge they give rise to.

The charge on cars is calculated by multiplying the list price of the car by a percentage which depends on the CO2 emissions of the car. The table overleaf shows the percentages for 2006/07. Remember this is the amount being charged to tax, not the tax itself. Only the list price is used, irrespective of age (except that there are special rules for classic cars), and the cost of any extras must also be added.

The CO2 emissions of all cars are listed in well known car magazines or can be found on the internet. The definitive official figure for each car can be found on the Vehicle Registration Document.

Discounts apply to certain environmentally friendly cars. For cars registered before 1 January 1998, the charge is based on engine size.

If the car has a diesel engine the charge is increased by 3% (except that it cannot exceed 35%). However, diesel cars registered before 1 January 2006 and which met the Euro IV emission standards do not suffer this supplement.

Example

Paul has a BMW 320d (diesel) registered on 1 February 2006. It has an original list price of £20,955 and CO2 emissions of 169. Paul had extras fitted to the car costing £1,000.

In 2006/07 the taxable benefit will be £5,050 ((20,955 + 1,000) x 23%). If Paul is a higher rate taxpayer the tax due on this will be £2,020 for the year.

Fuel for private use

A separate charge applies where fuel is provided by the employer for a company car. The charge is calculated by applying the percentage figure used to calculate the company car benefit to a fixed figure which for 2006/07 is set at £14,400.

Medical Insurance

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

Home and mobile telephones

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 and their family. Where home telephone bills are paid by the employer, the amount paid will be taxed as a benefit. The employee may make an expense claim for the cost of business calls only but none of the line rental.

Cheap or interest free loans

If loans made by the employer to an employee exceed £5,000 in a tax year, tax is chargeable on the difference between the interest paid and the interest due at an official rate - currently 5%.

Childcare costs

Childcare costs paid for by an employer are exempt from both income tax and NIC. This applies to a place in an employer operated nursery or where the employer pays for registered or approved childcare. In this latter case, however, the exemption is limited to £55 per week and any excess over this is subject to tax and NIC.

The costs will normally be paid in the form of vouchers or alternatively paid direct to the childcare provider. Any scheme must be open to all employees or all employees at a particular location.

Registered or approved childcare includes childminders, nurseries and play schemes registered by Ofsted, out of hours clubs run by a school on the school premises or by a local authority and childcare schemes run by approved providers.

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Expense payments

Reimbursed expenses

Reimbursed expenses are taxable as a benefit but the employee can claim a deduction for those expenses incurred wholly for business purposes. The two will usually cancel out each other.

At the end of each tax year, the employer has to send a summary of all benefits to HMRC on form P11D. As well as the perks listed above, this form will include the reimbursed expenses.

The employee can then make an expense claim either on a self assessment return or by letter.

Because, often, nothing is taxable, employers can ask to be excluded from this process if they write to HMRC. This is known as a dispensation.

Mileage claims

Many employers pay a standard rate of mileage to all employees who use their own cars for business journeys. HMRC set authorised rates for business mileage which are currently 40p 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 authorised rate, tax relief is available on the difference. If, however, the employee is paid at more than these rates then the excess is taxable.

Example

In 2006/07 Dave travels 14,100 business miles in his own car and is paid 32p per mile by his employer.

Dave can claim tax relief of £513 ((10,000 x 40p) + (4,100 x 25p)) - (14,100 x 32p).

Mileage payments do not have to be shown on the form P11D unless more than the authorised rates are paid.

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Other transport issues

Vans

Where employees are provided with a van, and the only private use of this is to go backwards and forwards to work (including any incidental private use on the way), then no taxable benefit may arise. If there is private use beyond this, there is a benefit of £500 per annum or £350 if the van is more than 4 years old.

However, from 5 April 2007 the benefit on the private use of vans will rise sharply to £3,000 and there will be an additional benefit of £500 if fuel is provided for private use.

Motorcycles

The provision of a motorcycle by an employer for private use will be a benefit in kind. The taxable amount each year will be 20% of its market value when first provided as a benefit.

If an employee uses their own motorcycle for business travel their employer may pay them up to 24p per mile tax free. If the employer pays less than this then the employee may claim tax relief on the difference.

Bicycles

Keen to promote environmentally friendly travel, HMRC will not tax as a benefit the provision of a bicycle for travel to and from work or for incidental private use.

If an employee uses their own bicycle for business travel their employer may pay them up to 20p per mile tax free. If the employer pays less than this then the employee may claim tax relief on the difference.