Chapter 5

Employment income
TX (UK) FA 2020- Employment Income Sechan Devkota, ACCA

EMPLOYED v SELF EMPLOYED

Employed Factors to consider Self-employed

Contract of service C Contract Contract for services

Required to give notice/ No notice required

receive notice if employment
terminated
Wages/overtime with legal C Conditions of pay
rights to holiday pay, sick Fixed fee invoice for work
pay carried out, the more done
the more earned

A key person must be I Integral position

employed

e.g Director, Chairman

Borne by employer R Risk Borne personally,
financial risk for sub- standard
work
By employer told when and C Control
where to do work Individual decides how/ when
and where to do work

When employed entitled to L Legal rights

holiday pay, sick pay Not entitled to sick pay,
holiday pay, redundancy pay

Provided by employer E Equipment Use own equipment

Not allowed to have a S Substitute

Can use a helper, substitute
substitute to do the job

Key point

The more factors that indicate the person is employed the more likely the person will
be treated as employed (and vice versa). If a person works for one organization there is
strong indication of employment.

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Example 1 – Jonny
Jonny is self-employed and is proposing to enter into the following contractual arrangements with two part-
time salesmen.
• They will work on Tuesday and Wednesday mornings each week for a two month
period.
• They will be paid a fee of £300 for each new sales contract obtained.
No other payments will be made
• They will use their own cars
• Jonny will lend each of them a laptop computer Requirements:
Explain which of the proposed contractual arrangements with the salesmen indicate that they would be self-
employed.

Employed Self-employed
Conditions of pay The more work done the more salesman
earns
Risk The salesman only gets paid for the work
done which is risky

Control The salesman works on a Tuesday

Wednesday so is under the control of
Jonny

Legal rights No legal rights to sick pay, holiday pay etc

Equipment Laptop provided by Jonny

Motor car provided by the salesman

Substitute Not possible to have a helper or other
person to do the work as far as we can tell

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EMPLOYMENT INCOME

Proforma - Employment Income

£
(a) Salary X
(b) Bonus/Commission X
(c) Benefits X
(d) Reimbursed expenses X

Gross emoluments X
Less:
(e) Allowable expenses
 Donation to charity under a payroll deduction scheme (x)
 Contributions to an occupational pension scheme (x)
 Travel, subsistence and entertaining incurred wholly,
Exclusively and necessarily in the performance
Of the office or employment (x)
 Subscription to a professional body (x)
 Deficit on a mileage allowance (x)

Employment Income (E) X

SALARY AND BONUS

All directors and employees are assessed on the amount of earnings received in the tax year (the receipts basis).

The term 'earnings' includes not only cash wages or salary, but also bonuses, commission, round sum allowances
and benefits made available to the employee by the employer.

Salary
The amount of salary assessable in a particular tax year is the actual amount earned in the tax year.

Bonus
The bonus/commission is normally assessable in the tax year in which the bonus is received.

The rule to determine (receipt basis) when a bonus is treated as being received is on the earliest of
the following:

(1) When the bonus is actually received.

(2) When the person was entitled to receive the bonus.

Example 2 – Employment income

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Tom is employed by ABC plc and his annual salary was £36,000. On 1 January 2021 his annual salary was
increased to £42,000. Additionally Tom receives a bonus each February based on the company’s results.

Bonus
Y/e 31 December 2019 £3,000
Y/e 31 December 2020 £10,000

Additionally Tom pays 6% of his salary into his employer’s occupational pension scheme and donates £1,500
to charity under a payroll deduction scheme.

Required

Compute Tom’s employment income for 2020/21.

TAX FREE BENEFITS

Certain forms of employment income are exempt from income tax. The main examples of tax free benefits
include:

P arking provided by the employer.

E ye care testing paid for by the employer.

R elocation expenses paid by employer up to £8,000.

S taff canteen, staff gym and staff nursery at the workplace provided by the employer for the use of staff.

O ccupational and personal pension contributions from the employer.

N ursery facilities provided by the employer in the form of childcare payments and vouchers up to £55
per week paid to basic rate taxpayers (the tax free limit on the vouchers is reduced to £28 per week for
higher rate taxpayers and £25 per week for additional rate taxpayers).

A ccommodation which is job related.

A uthorised mileage allowance paid by employer when employee uses own car, motor bike or bicycle for
their employers business.

L ight and heat contribution from employer for an employee who works from home, up to £4 per week can
be received tax free.

L oan of a bicycle and cycling safety equipment if used wholly or mainly for travel between home and work is
exempt from tax.

I nterest saved on a cheap loan provided the loan ≤ £10,000.

I ndemnity insurance premiums paid by employer.

Medical treatment paid by the employer to enable an employee to return to work after a period of illness
or injury. The exemption is limited to a maximum of £500.

Mobile phone (mobile) provided by employer and used by employee to make private calls.

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Overnight personal expenses paid by employer such as telephone calls home, newspapers etc. Up to £5
per night for overnight says in UK and up to £10 per night for overnight says overseas.

Trivial benefits – these are tax free benefits provided they do not cost the employer more than £50 per
employee and they must not be cash or a cash voucher.

S taff training courses, staff Christmas parties (up to £150 per person per year) and staff counselling.

Subscriptions paid by an employer to professional bodies.

TAXABLE BENEFITS ASSESSABLE ON EMPLOYEES

(1) Medical insurance

(2) Mileage allowance benefit

(3) Company cars

(4) Fuel for private motoring

(5) Van benefit

(6) Accommodation benefit

(7) Council tax benefit

(8) Annual running costs benefit -Ancillary services

(9) Use benefit

(10) Transfer benefit

(11) Cheap loans

(12) Gift benefit

1. Medical insurance benefit

Employer pays for medical insurance premiums.

Medical insurance benefit arises when an employer pays medical insurance premiums for the benefit of
an employee. The taxable amount is equivalent to the medical insurance premiums paid.

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2. Mileage allowance benefit

If an employee uses their own car/motorbike or bicycle to carry out their employer’s business then the
employee is entitled to receive a mileage allowance from the employer to compensate for the additional
costs incurred in running the vehicle.

The amount which can be received tax free is the amount set by HMRC and the amount is called the Authorised
Mileage Allowance Payments (AMAP).

● Any payment that an employee receives in excess of the appropriate rate is taxable.

● If the employee receives less than the appropriate rate then the difference is tax deductible.

Up to 10,000 Excess over 10,000

Business miles business miles

Motor cars 45p 25p and vans

Motor cycles 24p 24p
Bicycles 20p 20p

Employers may also pay employees up to 5p per mile tax-free for each passenger carried on a business trip.

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Definition of business and private miles

Home

Business miles
Private miles

Business miles
Normal place Temporary
of work work place

Individual works at Individual works ≤ 2

this location for > 2 years at this location
years

Example 3 – Speedo Ltd

Speedo Ltd employs Sammy, Mary and Lucy. In 2020/21 they use their own vehicles for the purposes of
their employer’s business. They received the following amounts.

Employee Vehicle Mileage allowance Business miles

Sammy Car 47p 15,000

Mary Van 34p 7,000

Lucy Motorcyle 28p 8,000

Mary took a fellow colleague on one of her business trips (520 miles).

Calculate the mileage allowance benefit or deficit for each employee

3. Company cars

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Car benefit

= % x list price (Xa) x X/12 – amount employee pays employer towards the running cost

(a) Where a car is made available for private use, a benefit is deemed to arise as a result of the
private use of the car.

(b) The benefit is calculated as a percentage of the list price of the car when first registered and
includes the cost of extras, both those provided with the car and any made available
subsequently.

(c) The list price of the car can be reduced for the purposes of calculating the taxable benefit by
any capital contribution made by the employee, subject to a maximum of £5,000. The
percentage is then calculated on the reduced figure.

List price of car (Xa)

List price of car when first registered X

Plus: Cost of extras paid for by employer x
Less: Contribution employee gives employer towards the capital (x)
cost of the car (UL = £5,000)

Xa

(d) The percentage is increased by 1 per cent for every extra 5 grams emitted up to a maximum
of 37 per cent.

(e) The benefit charge is reduced by periods for which the car was unavailable for more than 30
days.

Percentage for calculation of Car Benefit- Petrol and Diesel Powered Motor Cars

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CO2 Emission Per KM Petrol and Diesel Car Diesel Car not meeting
meeting RDE2 Standard RDE2 Standard
% %
51-54 Grams 13 17
55 Grams 14 18
Each complete additional 5 An additional 1% is added to the 14% or 18% up to
Grams emission above 55 the maximum of 37%
grams

Note that the appropriate percentage for a diesel car is 4% higher than for a petrol car, unless the diesel car meets the
real driving emissions 2 (RDE2) standard (i.e. European standard for low nitrogen oxide emissions).

Appropriate percentage – electric-powered motor cars

A 0% percentage applies to electric-powered motor cars with zero CO2 emissions.

Appropriate percentage – hybrid-electric motor cars

For hybrid-electric motor cars with CO2 emissions between 1 and 50 grams per kilometer, the electric range of a
motor car is relevant:

Electric Range %

130 Miles or More 0

70 - 129 Miles 3

40 - 69 Miles 6

30 - 39 Miles 10

Less than 30 Miles 12

Example 4 - Boris:
Boris is provided with a petrol powered company car with CO2 emissions of 145g/km.
Identify the % to be used in calculating the taxable benefit arising on the provision of the company car.
Explain the difference if:
(a) The car was a diesel car which did not meet the RDE2 standard.
(b) The car was a diesel car meeting the RDE2 standard.

Example 5 - Louis
Louis is provided with a company car by his employer. The car has a carbon dioxide emission rate of:
(1) 132g/km.
(2) 187g/km.
(3) 62g/km.
(4) 53g/km.
Calculate the appropriate percentage assuming the car runs on petrol or is a diesel car, which does not meet the
RDE2 standard.

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Example 6 - Company Cars

During the tax year 2020/21 Fashionable plc provided the following employees with company motor cars:
(1) Marwa was provided with a diesel car, meeting the RDE2 standard, on 6 August 2020. The car had a list price
when of £13,500 but Fashionable plc secured a discount and paid £12,500. The motor car has an official CO2
emission rate of 107g/km.
(2) Betty was provided with a diesel powered company car throughout the tax year 2020/21. The car does not
meet the RDE2 standard. . The motor car has a list price of £16,400 and an official CO2 emission rate of
137g/km.
(3) Francisco was provided with a new petrol powered car throughout the tax year 2020/21. Francisco was
required to contribute £3,000 towards the purchase cost. The motor car has a list price of £22,600 and an official
CO2 emission rate of 214g/km. Francisco paid the company £1,200 during the tax year 2020/21 for the private
use of the motor car.
(4) Derek was provided with a hybrid-electric car throughout the tax year 2020/21. The car has a list price of
£60,000. The official CO2 emission rate of 39g/km and the electric range is 41 miles. Fashionable plc also paid for
the road tax, insurance and maintenance on the car, which cost £1,600 during the tax year 2020/21.
(5) Eisha was provided with an electric-powered company car throughout the tax year 2020/21. The car has zero
CO2 emissions. The car had a list price of £17,000. Calculate the car benefit taxable on each of the above
employees of Fashionable plc in the tax year 2020/21.

4. Fuel benefit

Fuel benefit = % x 24,500 x X/12

● The provision of private fuel is subject to a benefit which is in addition to the charge for the provision
of the car itself.

● For 2016/17 the benefit is calculated by using the same percentage that is used to calculate the car
benefit x £22,200 (given in exam).

● Contributions made by the employee towards the private fuel are ignored unless all private fuel is
reimbursed in full.

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● The benefit charge is reduced by periods of non-availability.

● If the employee reimburses the employer for the full cost of the private fuel then the fuel benefit is
nil. It is advisable for an employee to reimburse the employer for the full cost of private fuel when
the income tax on the fuel benefit is greater than the cost of the private fuel paid by the employer.
● No benefit is charged in relation to any electricity provided for an electric or hybrid car.

Example 7 – Minnie, Mickey and Kitty

Minnie Mickey Kitty

List price of car £11,800 £19,400 £89,600

Extras paid for by employer Alloy wheels £400

Employee contribution to cost of car £3,000 £9,000

CO2 of car 84 g/km 108 g/km 138 g/km

Type of engine Petrol Petrol Diesel (RDE2)

Date first provided 1.1.20 1.7.20 6.4.20

Private use 80% 70% 40%

Amount paid to employer towards the running £Nil £100 per £Nil
costs of the car month

Fuel provided by employer for private use Yes Yes No

Compute the taxable benefits for Minnie, Mickey and Kitty in 2020/21.

2020/21 Car benefit Fuel benefit

Minnie Type of car

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Type of car
Mickey

Kitty Type of car

Example 8- Gita

Gita was employed as sales manager of Wilt Ltd from 1 August 2020 at a salary of £60,000 p.a. From 1
November 2020, the company provided her with a car, the list price of which was £15,000 and the
emission rate was 119g/km. Up to 5 April 2021, she drove 6,000 miles of which 4,500 were for private
purposes. The company paid for all running expenses.

Between 1 November 2020 and 31 January 2021, the company paid for all petrol usage including private
use. Gita made a contribution to her employer of £15 per month towards the cost of the petrol for her
private use. From 1 February 2021 her employer only paid for business use petrol.

Calculate Gita's taxable earnings for the tax year 2020/21.

5. Van benefit
The annual scale charge used to calculate the van benefit when an employer provides the employee is
provided with a company van for private use is £3,490.

The van benefit is proportionately reduced if the van is only available for part of the tax year.

The van benefit is also reduced if the employee gives the employer a contribution toward the running costs
of the van.

A further taxable benefit arises if the employer provides fuel for private use, with no reduction for any
partial contribution made by the employee towards the cost of such fuel. The amount of this taxable
benefit for 2020/21is £666. This figure is reduced if the fuel is only available for part of the tax year.

Van benefit = £3,490 x x/12 – contribution employee makes to the employer towards the van’s running
costs.

Van fuel benefit = £666 x x/12

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Example 9 – Melody and Goofy

Melody Goofy

List price of van £12,200 £16,400

CO2 emission of the van 102 g/km 114 g/km

Type of engine Petrol Petrol

Date first provided 1.1.19 1.5.20

Private use 80% 70%

Amount paid to employer towards the £Nil £100 per
running costs of the van month

Fuel provided by employer for private use No Yes

Compute the taxable benefits assessable on Melody and Goofy in 2020/21.

6. Accommodation benefit

Job related accommodation

If accommodation provided by the employer is “job related” then no taxable benefit arises. Accommodation
is job-related if:

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- it is necessary for the employee to reside in the accommodation for the proper performance of his
job (e.g. a nanny who is required to live in the employer’s accommodation in order to look after the
children);

- the accommodation is provided for the better performance of the employee’s duties and it is
customary for such accommodation to be provided (e.g. soldiers living in army barracks provided
by the employer);

- there is a special threat to the employee’s security and the accommodation is provided as part of
the security arrangements.

Not job related accommodation

If accommodation provided by the employer is “not job related” then a taxable benefit arises by
evaluating the basic charge and sometimes the additional charge which is described on the next page.

Example 10 – Sally House

Sally is provided with a company flat on 1 January 2019 which cost the employer £155,000 when it was bought
in 2018. The annual value of the flat is £4,500.

The market value on 6 April 2020 was £200,000. The employer built on a conservatory before the start of the
current tax year costing £20,000.

Sally pays her employer £100 per month in rent to live in the flat. The employer pays the annual running
expenses of £5,000.

Assume the salary is £2,500 per month.

Required

Evaluate Sally’s employment income in 2020/21 official rate is 3%.

Taxable benefit

Not job related Job related

£
1) Basic charge Greater of:

(i) Rent paid by employer X1 X1 or X2 Taxable benefit = £Nil

(ii) Annual value x X/12 X2
(If employer owns the property then use
X2) 2) Add: Additional charge

(only applies if employer owns the

property and it cost the employer >
£75,000)
(Xi – 75,000) x 2.25% x X/12 X3

3) Less:
Rent employee pays employer (X)
Accommodation benefit X

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Calculation of the Xi figure to use when calculating the additional charge

£

Xi is defined as original cost of the property or MV X

(If the property was acquired by the employer more than six years before it
was made available to the employee use MV of the property when first
occupied by the employee)
Add: Cost of capital improvements paid by employer
before the start of the current tax year X

Xi

7. Council tax benefit

If an employer provides living accommodation to an employee, the employee is taxed not only on the
accommodation but also on the cost to the employer of paying for the council tax in connection with the
accommodation.

Council tax benefit

Amount employer has paid for the council tax – any contributions from employee.

8. Annual running costs benefit

If an employer provides living accommodation for an employee, the employee is taxed not only on the
accommodation benefit but also on the cost to the employer of providing ancillary services in connection
with that accommodation. Ancillary services include such items as heating and lighting, repairs and
maintenance and cleaning. The provision of furniture for the employee’s use is also included under the
heading of ancillary services and is assessed in the same way as assets with private use.

If the accommodation is job related then the benefit attributable to ancillary services cannot exceed 10% of
the net earnings (excluding ancillary services).

9. Use benefit

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The use benefit applies to the use of computers, furniture, TV sets, motorbikes and boats.

The assessable use benefit is determined as follows: £

X
Less: Rent employee pays employer for the use of the asset (X)
Use benefit
X

Exception to the general rule

Bicycles and safety equipment made available on loan to employees for travelling to and from work and for
business purposes are defined as a tax free benefit.

10. Transfer benefit

If the asset loaned to an employee is subsequently sold or given to an employee, then the employee is
additionally assessed on the transfer benefit.

Transfer benefit occurs in the tax year of the gift = higher of X1 an X2

(i) Cost to employer (original market value) less benefits assessed to date and any amounts paid by
employee.

£
Market value of asset when first provided X
Less: Use benefits already assessed (X)
Less: Amount employee paid employer for the gift (X)

Transfer benefit X1

(ii) Market value (MV) at date of gift less amounts paid by employee

£
Market value of asset when gifted to employee X

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Less: Amount employee paid employer for the gift (X)

Transfer benefit X2

11. Cheap Loan Benefit

This occurs where an employer makes a loan to an employee and the rate of interest paid on this loan is
less than the official rate 2.5%.

The interest saved on this loan is a tax free benefit to the employee provided the total amount of loans
provided to that employee are ≤£10,000.

If the loans provided to the employee are > £10,000 then the employee must pay income tax on the interest
they have saved.

Method of computing the loan benefit

Method 1 - The average method

The amount of loan outstanding at the start and end of the tax year are averaged and then multiplied by
the official rate (3%). The interest actually paid by the employee is then subtracted, giving the assessable
loan benefit. Exam technique for the average method

£
Average Loan x official rate of interest X
Less Interest actually paid (X)

Assessable benefit X

––––

The taxable benefit is based on the average loan

Opening balance + Closing balance = average loan

Method 2 - The accurate method

The amount of interest at the official rate is computed precisely. Interest actually paid is then subtracted,
giving the assessable loan benefit.

The first method is quicker and easier and is generally used. However, either the employee or HMRC may
insist that the accurate method should be used. The employee will presumably do so if this results in a
lower assessment and HMRC may do so if it appears that the “average” method is being used to
deliberately exploit tax avoidance.

The exam technique for the accurate method

£
Actual loan(1) x official rate x months of loan (1)/12 X
Actual loan(2) x official rate x months of loan (2)/12 X
Less Interest actually paid (X)

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Assessable benefit X

––––
Example 11- Harry Burrows

Harry is employed by Warren Ltd and has an annual salary of £45,000.

On 1 January 2020, Warren Ltd provided Harry with an interest free loan of £40,000 to buy a house.

On 31 December 2020 he repaid £10,000 of the loan.

Calculate Harry’s employment income for 2020/21.

Example 12 – Sid Northern

Sid Northern is employed by Underground Ltd.

On 1 May 2019, Underground Ltd provided Sid with a loan of £120,000 so that he could buy a holiday
cottage. Sid repaid £50,000 of the loan on 31 July 2020 and repaid the balance of the loan on 31 December
2020. Sid paid loan interest of £1,100 to his employer during 2020/21.

Calculate the taxable benefit assessable on Sid in 2020/21.

12. Gift benefit

The taxable benefit is the market value of the asset at the time of the gift.

The employee is then treated as if that asset cost market value.

The most common type of gift made by an employer is shares in the company the employee is working for.
Example 13 – Hector Hill

Hector Hill is managing director of Hill plc. He is also a substantial shareholder in the company.

The company’s accounts show the following information:

Years ended 30 April: 2019 2020 2021

£ £ £
Salary, as managing director 13,620 43,560 44,100
Performance bonus 10,000 15,000 18,000
The performance bonus is determined and paid in the July following the accounting year end.

Mr Hill has the use of a motor car with a list price of £34,000. The CO2 emissions were 55 grams per
kilometre. All diesel and expenses were paid by the company. Mr Hill drove a total of 18,000 miles in

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2020/21, of which 10,000 were for private purposes. He reimbursed the company £30 per month towards
the car’s running expenses and £20 per month in respect of private fuel.

Mr Hill also has had the use of a company house since 6 April 2020, whose annual value is £1,200 and
which is provided rent free. The house had cost £90,000 in 2000 and its market value in April 2020 was
£135,000.

Mr Hill was provided with a plasma television for his personal use since 6 April 2018 when it cost £1,200.
On 6 April 2020 the television was sold to Mr Hill for £225 when its market value was £375.

The company pays private medical insurance for all its employees. Mr Hill’s share of the group premium
was £320 for 2020/21. In June 2020 he needed to have treatment following a motor accident and the cost
to the insurance company was £1,720.

In 2020/21 Mr Hill was reimbursed £1,500 in respect of business travelling in the UK.

Required

Calculate Mr. Hill’s employment income for 2020/21 after his claim for a deduction from employment
income.

THE PAYE SYSTEM

Real time reporting

The PAYE Real Time Information (RTI) system is being introduced by HMRC. This system requires
employers to send data about employees’ pay, income tax and national insurance to HMRC at the time
that the employees are paid (either weekly or monthly). On-line data transmission is mandatory. Penalties
are now imposed on a monthly basis if these submissions are made late.

This table is not supplied in the exam – please learn.

Monthly submission which are late Penalties

1st late transmission in the tax year Nil

2nd late transmission in the tax year

Up to 3 months late
Between £100 - £400 depending on the
number of employees

More than 3 months late 5% of the tax and NIC due

Important dates for the PAYE system in 2016/17

P60 Given to each employee listing gross pay, tax deducted and NIC for the year. The P60 must be
given to the employee by 31 May 2021

P11D Return submitted for all employees who receive taxable benefits. 6 July 2021.
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P45 Given to employee on leaving employment. The employee is given three copies, two copies
are given to the new employer and one copy is kept by the employee.

Coding notice
● To enable the employer to deduct the correct amount of tax from each employee HMRC issues a tax
coding.

● The tax code takes into account deductions and allowances available.

Calculating the PAYE code

Allowance £ Deductions £

Personal allowance X
Taxable benefits X
Allowable expenses X
Adjustment for underpaid tax X
Adjustment for overpaid tax X
--- X
X
If allowance > deductions

Take the net figure and remove the last digit and add letter L at the end.

L = entitled to basic personal allowance

If deductions > allowances

Take the net figure and remove the last digit and add letter K at the start.

Example 14 – Dorian

Dorian has an annual salary of £25,000 and taxable benefits of £3,725 in 2020/21.

What is the PAYE code for 2020/21?

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