Tax and employment

Areas where our advice solves problems and adds value
  • Checking your PAYE code
  • Putting together an attractive and tax-efficient remuneration package
  • Obtaining an HMRC reporting dispensation to cut down on paperwork and compliance costs
  • Maintaining ‘adequate’ records of mileage and expenses
  • Funding pensions
  • Rewarding performance
  • Reducing NIC costs
  • Understanding the tax and NIC costs of company cars
  • Reducing the cost of company cars, and reviewing the alternatives
  • Replacing company cars with company ‘vans’

Many people can go for years paying too much (or, perhaps more worryingly, too little) tax. PAYE aims to collect, over the course of a tax year, approximately the right amount of tax from your earnings.

Is your PAYE code correct?

Many people can go for years paying too much (or, perhaps more worryingly, too little) tax. This has not been helped by errors made by the tax authorities.

PAYE aims to collect, over the course of a tax year, approximately the right amount of tax from your earnings. This is done by the issue of one, or sometimes a series of tax codes, which are used by your employer to calculate the tax to be deducted from your earnings.

Many employees have incorrect tax codes. In particular, they may not have notified the tax office of changes in their circumstances that would affect their tax position, such as changing jobs and / or losing the benefit of a company car, or they may have started investing in a pension.

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, look at your salary slip and see what code is currently being applied. The letter at the end of 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 standard personal allowance
  • P indicates that the employee is entitled to the lower single age allowance, i.e. an employee born between 6 April 1938 and 5 April 1948
  • Y indicates that the employee is entitled to the higher single allowance, ie - an employee born before 6 April 1938
  • T means that your code requires manual checking by HMRC each year

Or you may have the letter K at the beginning of your code. This is a special tax code and means that you are paying tax on more than just your salary through PAYE. It may be that the tax due on your state pension might be collected through increasing the tax you would otherwise pay on your company pension, or you may be receiving some rental income which is being taxed through your salary rather then you paying tax at the end of the year. If you owe back tax, this can also be collected by an adjustment to your tax code. A K code applies when the adjustments made reduce your allowances to less than zero - in effect, it means that you have a 'negative' tax allowance. The maximum tax which can be deducted using a K code is 40% of your income in each month.

Other codes include:

BR: This is used when all your income is taxed at the basic rate and is most commonly used for a pension. This code was also often used for a second job, but more commonly this is now coded 0T.

DO: This is used when all your income is taxed at the higher rate of tax

D1: This is used when all your income is taxed at the additional rate of tax

NT: This is used when no tax is to be deducted from your income or pension

Use our Payslip Calculator to check your payslip.

Cheap or interest-free loans

Where loans from an employer total more than £10,000 at any time in the year, tax is chargeable on the difference between any interest actually paid and interest calculated at the 'official' rate (currently 3.25%).

Your remuneration package

An attractive remuneration package can include any of the following:

  • Salary
  • Reimbursement of expenses
  • More generous expenses - business travel in first or business class, or a better quality hotel on business trips
  • Bonus or profit related award schemes
  • Share incentive arrangements
  • Pension provision
  • Childcare
  • Life assurance and/or healthcare
  • Choice of a company car or additional salary and reimbursement of car expenses for business travel in your own car
  • Mobile phone
  • Contributions to the additional costs of working at home
  • Other benefits in kind including, for example, annual parties costing not more than £150 per head for the year, or long service awards

Of course, negotiating the appropriate package is a matter for you and your employer, but you should seek our advice to ensure that your overall package is as tax and NI efficient as possible.

Expense payments

Your employer is required to report expenses payments to HMRC on form P11D each year. To avoid paying tax on these payments you have to claim a deduction on your Tax Return - your employer will provide you with a copy of your 2014/15 P11D by no later than 6 July 2015.

This cumbersome process of reporting and then claiming expenses paid 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 they 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 in the course of an HMRC inspection visit.

You may be able to claim tax relief for other expenses you incur in connection with your job, but the rules are very restrictive, and you may not always be able to claim for expenses you regard as reasonable work related expenditure.

Travel and subsistence

The rules which allow tax relief for travelling and subsistence expenses are quite complex, and subtle differences in your working arrangements can change the amounts which you are able to claim, or can be paid tax free. You will not normally be able to claim for the cost of travelling to your normal place of work, but if you have more than one place of work, sometimes travelling expenses are tax deductible when travelling to a temporary place of work for up to 24 months.

Site-based employees are 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 subject to meeting certain conditions.

Because the tax impact on your travelling expenses can be quite significant, you should ask for help if you are considering a change involving a long commute to work.

If an employee works from home, he or she may be paid an expense allowance of up to £4 a week by the employer without having to produce evidence of expenses.

If travelling on work, personal incidental expenses may be paid tax-free up to £5 a day in the UK or £10 a day overseas. This is designed to cover such odd expenses as newspapers and laundry that may not otherwise be allowable.

Pensions

Employer contributions to your pension scheme or your own personal pension policies are not liable for tax or NICs. The employee's contribution attracts tax relief but not relief from national insurance.

You should be aware that while your employer can contribute to your personal pension scheme, these contributions are added to your own for the purpose of measuring your year's pension input against the annual allowance which is £40,000. Extra relief may be available dependent on your level of contributions during the last three tax years. Please ask us or your normal pension adviser for advice.

Performance related pay

Although there are no tax breaks, performance related pay and bonus schemes are incentives to many to work harder and enjoy some of the benefits of the employer's increase in profits. There can, on the other hand, be a national insurance saving for employees (not directors) if performance related pay is not included in the weekly or monthly pay, but instead paid as a one off bonus.

Areas where our advice solves problems and adds value
  • Checking your PAYE code
  • Putting together an attractive and tax-efficient remuneration package
  • Obtaining an HMRC reporting dispensation to cut down on paperwork and compliance costs
  • Maintaining 'adequate' records of mileage and expenses
  • Funding pensions
  • Rewarding performance
  • Reducing NIC costs
  • Understanding the tax and NIC costs of company cars
  • Reducing the cost of company cars, and reviewing the alternatives
  • Replacing company cars with company 'vans'

What is your annual fuel cost? Check out our fuel cost calculator

The system for taxing those who use company cars has seen annual incremental increases in the cost of benefits, while maintaining the basic approach to taxing those who use a company owned vehicle. The basis of the charge is to tax a figure calculated by multiplying the car's list price by an emission-based percentage, with a 3% surcharge on diesel powered cars until 2016.

Cars emitting CO2 at a specified level are taxed on rates varying from 5% to 35% of the list price. Emissions for petrol driven cars from 1 to 75 g/km are taxed at 5% and from 76-94g/km, at 11% of list price.

Cars running solely on diesel fuel are currently subject to a 3% supplement. Special rules apply to cars running on electricity. Employees and directors who are provided with a company car that is propelled solely by electricity will not have to pay tax on the benefit until 2015. 

Cars with higher levels of CO2 emission are taxed on a graduated scale rising to a maximum (for both petrol and diesel) of 35% of the car's price. The detailed figures are shown in our taxable benefits table. These figures apply to all company cars, including second cars.

CO2 emission information

For all cars first registered from at least November 2000, the definitive CO2 emissions figure for tax purposes will be recorded on the Vehicle Registration Document (V5). Under an agreement with HMRC, the Society of Motor Manufacturers and Traders (SMMT) is providing a CO2 emissions enquiry service on their website at www.smmt.co.uk for cars first registered from January 1998.

 

Older cars

Cars first registered before January 1998, for which there are no reliable CO2 emissions data, are taxed according to their engine size, as follows:

Engine size (cc)    Percentage of car's price charged to tax
0 - 1400 15%
1401 - 2000 22%
2001 and more 32%

Fuel scale charges

Where the employer pays for any fuel used privately by the employee, there is an additional scale charge based on the CO- based car benefit percentage applied to a standard value of £21,700.

Employee contributions

Where the employee is required, as a condition of the car being made available, to pay for the private use of a car, the value of the benefit is reduced accordingly (on a pound for pound basis). Capital contributions of up to £5,000 made by employees towards the cost of the car and/or accessories, when the car is first made available, will reduce its list price for tax purposes.

By contrast it is ‘all or nothing' for the fuel scale charge, which remains at the full value unless the employee pays for all private fuel!

HMRC has published advisory fuel only rates which will be accepted either for employers reimbursing employees for the cost of fuel for business mileage, or for employees reimbursing employers for the cost of fuel for private mileage in a company car. Alternative rates may be negotiated, for example when it is necessary for the performance of his or her duties that an employee uses a four-wheel drive vehicle. In this instance a higher rate per mile might be agreed due to the typically higher fuel consumption

Current mileage rates

1 September 2014

These mileage rates came into force officially on 1 September 2014.

Advisory fuel only mileage rates
  Rates per mile
Engine size Petrol LPG
1400cc or smaller 14p 9p
1401cc to 2000cc 16p 11p
Bigger than 2000cc 24p 16p

 

Engine size Diesel
1600cc or less 11p
1601cc to 2000cc 13p
Over 2000cc 17p

1 June 2014

These mileage rates came into force officially on 1 June 2014.

Advisory fuel only mileage rates
  Rates per mile
Engine size Petrol LPG
1400cc or smaller 14p 9p
1401cc to 2000cc 16p 11p
Bigger than 2000cc 24p 16p

Engine size Diesel
1600cc or less 12p
1601cc to 2000cc 14p
Over 2000cc 17p

1 March 2014

These mileage rates came into force officially on 1 March 2014.

Advisory fuel only mileage rates
  Rates per mile
Engine size Petrol LPG
1400cc or smaller 14p 9p
1401cc to 2000cc 16p 11p
Bigger than 2000cc 24p 17p

Engine size Diesel
1600cc or smaller 12p
1601cc to 2000cc 14p
Bigger than 2000cc 17p

 

 

 

Tax payable

These standard charges are subject to income tax at the basic, higher or additional rate (depending on the employee's rate of pay). The tax is usually collected under the PAYE system by appropriate adjustment of the employee's tax code.

For the benefit to be attractive, the employee must pay less in extra tax than it would cost them to run their own car out of their taxed income. These are examples of the 2014/15 tax costs to an employee of a company car:

Basic rate liability example

List Price CO2 emission g/km Tax Rate 20%
Petrol Diesel
Car
£
Fuel
£
Car
£
Fuel
£
£13,000 164 650 1085 728 1215
£18,000 196 1152 1389 1260 1519
£25,000 240 1750 1519 1750 1519

Higher rate liability example

List Price CO2 emission g/km Tax Rate 40%
Petrol Diesel
Car
£
Fuel
£
Car
£
Fuel
£
£13,000 164 1300 2170 1456 2430
£18,000 196 2304 2778 2520 3038
£30,000 240 4200 3038 4200 3038

Additional rate liability example

List Price CO2 emission g/km Tax Rate 45%
Petrol Diesel
Car
£
Fuel
£
Car
£
Fuel
£
£13,000 164 1463 2441 1638 2734
£18,000 196 2592 3125 2835 3418
£40,000 240 6300 3418 6300 3418

Use our calculator to check your car benefit

Tax free benefits

  • Car Parking

The provision of a car parking space at or near the employee's place of work is not an assessable benefit.

  • Pool Cars

There is no tax for using a pool car. This is one where private use is merely incidental to the business use, and it is not normally used by one employee to the exclusion of all others.

Please note: A pool car must not normally be kept overnight at or near an employee's home.

  • "Lower Paid" Employees

The provision of a car for an employee (NOT a director) who is paid at a rate below £8,500 per year (including the value of benefits) does NOT attract any charge to income tax. Nor is there any charge on fuel for private use provided to such employees.

  • Special Consideration for Sole Traders

If your spouse is employed in your business (but not as a partner), it can be very tax efficient to provide them with a car, as long as they earn well below £8,500. The use of the car can be tax-free in their hands, and the business will get full tax relief on all the expenses connected with the car, provided you can demonstrate the car is necessary for business purposes.

Note that all benefits and salaries to a spouse must be justifiable. In other words, the remuneration must be at the same level that would have been paid to a non-spouse who did the same work.

Business use of an employee's own car

It is quite normal practice for employees to be reimbursed at a reasonable mileage rate for business use of their own cars.

A statutory system of tax and national insurance free mileage rates applies for business journeys in employees' own vehicles, as follows:

Cars and vans
On the first 10,000 miles in the tax year 45p per mile
On each additional mile above this 25p per mile
Motor cycles 24p per mile
Bicycles 20p per mile

It is no longer possible to make a claim for tax relief based on actual receipted bills, nor claim capital allowances or interest on loans related to car purchases.

Note that the lower rate for more than 10,000 business miles only applies to income tax. The national insurance rate remains at 45p for any number of miles.

Unless the employee is reimbursed at a rate higher than the statutory mileage rate, the payments do not need to be reported on a P11D.

Passenger payments

When an employee travelling on business carries fellow employees as passengers he may be reimbursed a further 5p per passenger tax free provided the journey is a business journey in respect of the passengers. No claim can be made if the employer does not make passenger payments.

Company vans

The taxable benefit for the unrestricted use of company vans is £3,000 (with no reduction for older vans) plus a further £568 of taxable benefit if fuel is provided by the employer for private travel.

The tax payable on the use of a company van ranges from £600 up to £1,604 p.a., and the employer's Class 1A NIC payable ranges from £414 to £492 p.a.

Use our calculator to check your van benefit

Tax saving check list

  • Keep adequate records of business mileage.
  • Always check your tax code to see that the correct benefit is being applied.
  • Sole traders and partners should consider the potential tax advantages of providing their spouse with a company car.
  • If you have low private mileage, you may be better off if you pay for all your own private fuel.
  • If you have high business mileage, it may be better to use your own car and claim "mileage" from your employer.
  • Encourage your employer to apply for a P11D dispensation.
  • If you are on the borderline of "lower paid", think about setting up a contribution for the use of the car, to keep on the right side of £8,500.
  • Tax - free parking is a must!

Company cars - beyond 2014

  • From 2014/15, the taxable benefits tables are revised. These have now been published for tax years 2014/15, 2015/16 and 2016/17.
  • These reduce the thresholds for each percentage band of emissions.
  • From 2015/16, the 0% rate for electric cars are abolished. Such cars will have a percentage rate of 5%. Very low emissions vehicles (up to 50 g/km) will be taxed at 5%, with a 9% rate applying to emissions between 51g/km and 75 g/km. These rates will rise gradually over the next few years. Also from 2015/16, the upper scale is extended from 35% to 37%.
  • From 2016/17, the 3% premium for diesel engines is removed.

2014/15 company car taxable benefits table

 

CO2 emissions (g/km)* Petrol Diesel
 1 to 75 5% 8%
76 to 94 11% 14%
95 to 99 12% 15%
100 to 104 13% 16%
105 to 109 14% 17%
110 to 114 15% 18%
115 to 119 16% 19%
120 to 124 17% 20%
125 to 129 18% 21%
130 to 134 19% 22%
135 to 139 20% 23%
140 to 144 21% 24%
145 to 149 22% 25%
150 to 154 23% 26%
155 to 159 24% 27%
160 to 164 25% 28%
165 to 169 26% 29%
170 to 174 27% 30%
175 to 179 28% 31%
180 to 184 29% 32%
185 to 189 30% 33%
190 to 194 31% 34%
195 to 199 32% 35%
200 to 204 33% 35%
205 to 209 34% 35%
210 and over 35% 35%

*The exact CO2 figure is rounded down to the nearest 5g/km.

Cars that cannot emit CO2 by being driven have a benefit of 0%.