Employees’ income tax is collected by the Revenue under the Pay As You Earn (PAYE) system. Each employee is given a tax code number and the employer deducts tax from earnings by reference to that number.
Many code numbers are incorrect and you should always check your number and contact the Revenue if you are unsure. Code numbers reflect many items, including tax you may owe on benefits in kind. Common benefits include travel and subsistence costs, cars and private medical insurance.
If your employer reimburses you for expenses you incurred whilst out on business, you would have thought that there could be no tax bill. However, this is not always the case and you should check the system used by your employer. Otherwise, you could end up paying too much tax.
At the end of each tax year, your employer has to send a summary of all of your benefits to the Revenue on form P11D. This will include all payments made to you to cover expenses such as subsistence and hotel bills. You, as an individual, can then write to the Revenue and claim tax relief on expenses you originally paid out of your own pocket wholly for business purposes. Of course, the answer may be that nothing is taxable and so employers can ask to be excluded from this process if they write to the Revenue. This is known as a dispensation.
Tax TipCheck whether your employer has a dispensation. If not you will need to make entries on your tax return to:
|
If you do not receive a tax return you should write direct to the Revenue to make a claim.
Many employers pay a standard rate of mileage to all employees who use their own cars for business.
The maximum rates that can be paid tax-free are as follows:
Up to 10,000 miles - 40p
Over 10,000 miles - 25p
If you are paid for business miles at less than the authorised rate, you can write to the Revenue and ask for tax relief on the difference.
ExampleDave is a basic rate taxpayer and travels 4,100 business miles per year in his car and is paid 32p per business mile by his employer.
|
Furthermore, the employer is able to pay an additional 5p per mile tax-free to the employee if they take a fellow employee on a business journey as a passenger.
Tax TipRemember to check your mileage allowances and write to the Revenue for your repayment of tax if appropriate. |
Company cars are taxed by reference to the list price and the carbon dioxide (CO2) emissions measured in grams per kilometre. Low emission cars (up to 140 gm/km in 2005/06) are charged at 15% of the list price building up to a maximum of 35% for high emission cars (240 gm/km and above in 2005/06).
Discounts apply to certain environmentally friendly cars. For cars registered before 1 January 1998, the charge is based on engine size.
CO2 emissions are recorded on the Vehicle Registration Document (V5). If the car has a diesel engine there is a 3% supplement unless the car meets the Euro IV emission standards in which case the supplement is waived. From 6 April 2006, the waiver will cease for cars registered on or after 1 January 2006.
Tax TipConsider acquiring that new company diesel before the end of December 2005. The waiver of the 3% supplement will be retained for the life of diesel cars that meet the Euro IV standard and were registered before 1 January 2006. |
A separate charge applies where private fuel is provided, unless the employee reimburses the employer for all private mileage (including travel between home and work).
The charge is calculated by applying the percentage figure used to calculate the company car benefit to a fixed figure which for 2005/06 is set at £14,400.
Tax TipIf you are provided with private fuel, check the amount of tax you are paying compared to the actual cost of petrol on your private mileage. It may be that it is cheaper to opt out of employer provided private fuel and pay for it yourself. |
The provision of private medical insurance is a taxable benefit.
An annual benefit is generally taxable where employees have the private use of company assets. The annual benefit amounts to 20% of the asset’s market value when first made available to any employee.
Private home telephone bills, including rental charges, which are paid for by the employer will be taxed as a benefit. There is no charge for private calls using a company mobile phone.
The Revenue will not tax as a benefit a Christmas party and other annual functions provided the total cost of the events in a tax year is less than £150 per head.
If loans made by the employer exceed £5,000 in a tax year, tax is chargeable on the difference between the interest paid and the interest due at the official rate. This situation often occurs with directors who overdraw their loan or current account and special attention should be paid to this issue, as the Revenue often check up on it.
In general employees’ national insurance (NI) is not due on benefits in kind except vouchers, stocks and shares, the payment of an employee’s personal liability and benefits provided by way of ‘readily convertible’ assets.
Most benefits in kind however are subject to Class 1A (an employer’s NI contribution). As this currently amounts to 12.8% of the taxable value of the benefit, you may need to reconsider the tax efficiency of providing benefits.
Tax TipContributions by your employer to a pension scheme are tax and NI free. This may be far better than any other perk. If you plan to sacrifice some of your ‘normal’ salary to do this, talk to us to make sure your salary sacrifice scheme is effective. |