Employment options

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.

• Cheap or interest free loans
• Your remuneration package
• Expense payments
• Travel and subsidence
• Pensions
• Performance related pay
• Payslip calculator
• Car benefit calculator

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 includes the full higher rate personal allowance for age 65 - 74, assumes income less than £24,001
• Y includes the full personal allowance for age 75, assumes income less than £24,001
• T means that your code requires manual checking by HM Revenue & Customs 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 50% 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 from 6 April 2012 this is now usually coded as 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 £5,000 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 4%).

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, an annual function costing not more than £150 per head, 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 HM Revenue & Customs 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 2011/12 P11D by no later than 6 July 2012.

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 HM Revenue & Customs 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 HM Revenue & Customs 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.

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 impact of tax 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.

Pensions

Employer contributions to your pension scheme or your own personal pension policies are not liable for tax or NICs. 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 now £50,000. 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.

• CO₂ emission information
• Fuel scale charges
• Employee contributions
• Current mileage rates
• Basic rate liability example
• Higher rate liability example
• Additional rate example
• Tax free benefits
• Business use of an employee's own car
• Passenger payments
• 2011/12 taxable benefits table
• Case study
• Two rules of thumb
• Pool cars
• Company vans
• Tax saving check list

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.

The taxable value of the benefit continues to be up to a maximum of 35% of the list price of the car when first registered. The list price includes the full cost of the car, car tax (if applicable), Value Added Tax and delivery charges. From April 2011 there is no cap on the list price of the car for calculating the benefit (previously an £80,000 limit applied). The list price of accessories must be included whether fitted when new or subsequently.

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 76-120g/km, at 10% of list price.

Cars running solely on diesel fuel are 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. The relief will apply for five years.

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 HM Revenue & Customs, 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:

Fuel scale charges

Where the employer pays for any fuel used privately by the employee, there is an additional scale charge based on the CO₂-based car benefit percentage applied to a standard value of £18,800.

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!

HM Revenue & Customs 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 of such vehicles.

Current mileage rates

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 2011/12 tax costs to an employee of a company car:

Basic rate liability example

Higher rate liability example

Additional rate liability example

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.

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:

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.

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 they 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.

Case study

Helen's company is successful and she pays tax at 40%. She runs a petrol driven company car costing £28,000, with emissions of 175g/km.

Her 2011/12 tax bill on the car is therefore: £28,000 x 25% x 40% = £2,800.00

Helen's company will pay Class 1A NICs of: £28,000 x 25% x 13.8% = £966.00

The company also pays for all of Helen's petrol. Because Helen does not reimburse the cost of fuel for private journeys, she will pay tax of: £18,800 x 25% x 40% = £1,880.00 and the company will pay Class 1A NICs of: £18,800 x 25% x 13.8% = £648.60

The total tax and NI costs are therefore over £6,295. Furthermore, although the company is paying for the fuel, the company will also need to pay a gross amount of over £7,896 to provide Helen with the funds to pay the tax. When employers' National Insurance is taken into account, the gross cost of funding the full tax and the National Insurance liabilities will be over £10,600.

Two rules of thumb

Q: Am I better off giving up the company car and instead claiming mileage allowance for the business travel I do in a car that I buy myself?

The rule of thumb answer is that you are more likely to be better off if your annual business mileage is modest and you run an inexpensive car.

Q: Am I 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?

The rule of thumb answer is that you are more likely to be better off taking the free fuel if your annual private mileage is high.

Every case needs to be looked at on its own merits, and considered from the point of view of both the employee and the employer. And cost is not the only factor. As an employee, it might cost you more to have a company car, but you do not have to worry about bills or the cost of replacing it. As an employer running company cars, it might be more expensive, but you retain control over what may, for your business, be key operating assets.

Use our calculator to check the cost of your car or van benefit.

Pool cars

The HM Revenue & Customs definition of a pool car is very strict, but if a car qualifies, there is no tax or NIC liability. If you are not provided with exclusive use of a car, are generally only allowed to use it for business journeys and are not permitted to take a car home at night, you may be able to claim that you are using a pool car.

Company vans

There is a standard taxable benefit of £3,000 plus a further £550 of taxable benefit on company vans if fuel is provided by the employer. The benefit will apply unless only insignificant private use is made of the van, but home to work travel is regarded as business use for this purpose. However, the van must be provided for business use. If there is no conceivable business use, the van will be taxable. The maximum tax payable on the use of a company van (including fuel) is therefore £1,775, and the employer's Class 1A NIC payable is £489.90.

Many people have seen significant savings for both employer and employee in replacing company cars with employee-owned cars part-funded by mileage allowances at HM Revenue & Customs approved rates. However where a company vehicle is still appropriate, a 'van' rather than a car is worth considering. Why the inverted commas? You might be pleasantly surprised by some of the vehicles that qualify as 'vans'.

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
• 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!    

Do contact us if you would like further help or advice on this subject.