Employment or Self-Employment?
There is a fundamental difference between income received as an employee and as a self-employed person/independent contractor. Where income is paid as employment income, the employer must deduct income tax and National Insurance contributions under the PAYE system and remit it to HMRC. There are quite different rules in terms of allowable expenditure and deduction between employment income and the trading income of a self-employed person who provides his services as an independent contractor.
Difficult questions can arise as to whether an arrangement is really an employment or an independent contract. Generally, an employee is somebody under the direction and control of the employer. This was a more traditional test. Because of how employment has changed, this has been refined to a test as to whether the person concerned is in business in his own account.
The basis of Tax Charge
All employees and directors are assessed on earnings received in the tax year. Earnings include cash salary but also a bonus, commissions and other benefits provided by the employer.
As in Ireland, there are very limited deductions allowable against an employee’s income for the purpose of calculating the tax. Expenditure must be wholly exclusively and necessarily incurred in the performance of the employment duties. This is much narrower than the test in respect of business expenses.
Certain expenses are allowed as deductions against employment income. These include contributions to pension scheme subject to certain limits, certain expenditures on travel subject to stringent rules and certain expenses incurred for equipment and machinery necessarily provided by the employee.
Travel expenses may only be incurred where they are necessarily incurred in the performance of the duties. Therefore the cost of commuting to and from work is not allowed. Necessary commuting within the working day is allowable if visiting a client. No relief is given for travelling between two separate employments.
As in Ireland, there are approved mileage allowances for employees who use motor cars for business purposes. The allowances are equivalent to the civil service rate allowed. They specify the maximum rates which can be claimed.
Benefits in Kind
In addition to salary earnings, the value of benefits in kind received by employees e.g. a company car is subject to income tax. There are certain exemptions for employees earning less than a certain amount.
Where employers reimburse expenses, the employer must report these on form P11D (as in Ireland). A claim for deduction must be made against employment income. Approval can be obtained in advance from HMRC to dispense with the requirement to omit particular types of pre-approved expenses from the form P11D which would otherwise need to be reported.
Employees are taxed on the basis of the value of the benefits. A benefit provided to a member of the family is also taxable in the same way. The benefit must be reported to HMRC . Small benefits of less than £50 each up to £300 annually are exempt.
BIK on Particular Assets
Where assets are provided for the use of the employee 20% of the assets market value is assessed at tax. Some assets and benefits are subject to particular rules.
Where a company car is available for private use, the benefit is subject to income tax. The benefit is calculated on the list price of the car. The charge benefit is a percentage of the price of the car. The value of a “company car” for this purpose is based on a table which is based on its price but factors in carbon dioxide emissions with a further charge. The tax charge is based on between 9% of the price increases to 37% in the case of high emissions. If fuel is paid for this is taxable, to the extent of private use.
No individual use of a pool car is assessed to tax. There are strict conditions on pool cars. It must be used by more than one employee and must normally be kept overnight at the residence of the employee. Any private use must be merely incidental. There are separate benefit in kind rules in respect of fuel.
Company vans are taxed on a more favourable basis. The benefit in kind is based on a relatively low fixed amoint. No benefit arises when the private use of a van is insignificant. The benefit of the private use of a van depends on its age.
Where living accommodation is provided and expenses paid are generally taxable on the employee where the cost is met by the employer. There are certain limitations and special rules apply. Accommodation provided is taxed on the annual value based on the gross rateable value.
Where the value is over £75,000 the charge is based on the official interest rate,. The charge does not apply where living on the premises is required as a part of the job or is traditional in certain sectors.
A benefit in kind is charged in respect of loans to employees below a stipulated interest rate. The benefit is charged on the difference between the official rate and the rate actually paid. Beneficial loans are charged to tax to the extent that it is below HMRC deemed market rates; 2.5%. The charge does not apply where all loans are less than £10,000 (excluding certain loans that qualify for other tax relief)
There are certain exempt benefits such as certain subsidies, pension contributions, canteens, certain meals, right to certain car park spaces, provision of a mobile phone, benefit aimed at encouraging employees to travel to work by public transport, Christmas parties and workplace nurseries for childcare.
Payments of up to £55.00 per week to approved childcare is allowed where it commenced before 5 April 2011.Most workplace nurseries and childcare voucher schemes are exempt. Childcare vouchers are nott exempt if the employee uses the Tax-Free Childcare scheme.
Pensions and share incentive benefits are dealt with separately.
Termination Payments
A payment on termination is tax free if employment ceases because of the accidental death, injury or disability of the employee, or if the employee worked overseas most of the time.
If the sum is paid other than on death or retirement, the first £30,000 (including statutory redundancy in this limit) is tax free.
