Skip to main content

  • "Cook & Co have given us excellent service over the period that we have worked together."
  • "The accounts are meticulous, promptly prepared and at a reasonable cost."
  • "Cook & Co has handled all matters with competence and reliability..."
  • "We had to change our accountants and have never regretted choosing Cook & Co."
  • "It took us a while to find them but now we have, we are going to keep them!"
  • "...always on hand to provide technical advice and respond very quickly to any requests."
  • "Of particular benefit has been the expert tax advice received over the years..."

Tax and employment

The right PAYE code

The aim of the PAYE system is to collect the right amount of tax from your earnings throughout the course of the year. Your tax code - or sometimes a series of tax codes - is used by your employer to work out how much tax to deduct from your earnings.

However, many people can go for years paying the wrong amount of tax - either too much or, perhaps more worryingly, too little - because they have an incorrect tax code. In particular, they may not have notified the tax office of changes in their circumstances that would affect their tax position, such as a change in jobs or losing the benefit of a company car, or they may have started investing in a personal pension plan.

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, you can look at your salary slip to see which code is currently being applied.

The letter in 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 the basic personal allowance

P includes the full higher rate personal allowance for those born between 6 April 1938 and 5 April 1948 (assumes income less than £27,000)

Y includes the full personal allowance for those born on 5 April 1938 and earlier (assumes income less than £27,000)

T there is usually an adjustment in your code which requires manual checking by HMRC each year - for example, you might be older, with income over the limit for the full higher rate of personal allowance and therefore your allowance needs to be re-calculated every time the rates and limits change.

K HMRC may try to increase the tax you pay on one source of income to cover the tax due on another source which cannot be taxed directly - for example, the tax due on your taxable employment benefits might be collected by increasing the amount of tax you would otherwise pay on your company salary. A 'K' code applies when the 'other income' adjustment reduces your allowances to less than zero - in effect, it means that the payer has to add notional income to your real income for PAYE purposes. The maximum tax which can be deducted using a 'K' code is 50% of the source income.

HMRC will often try to collect tax on other income through your PAYE code but you may prefer to pay the tax through self assessment - contact us, as we can arrange for the adjustment to be removed.

Loans from an employer

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

Expense payments

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

This arduous process of reporting and claiming 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 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 during an employer compliance visit from HMRC.

You may be able to claim tax relief for other expenses you incur in connection with your job, but the rules are fairly restrictive.

An attractive remuneration package can include any of the following:

  • Salary
  • Bonus schemes and performance-related pay
  • Reimbursement of expenses
  • More generous expenses - business travel in first or business class, or a better quality hotel on business trips
  • Pension provision
  • Life assurance and/or healthcare
  • Mobile phone, including smartphones, such as iPhones and BlackBerrys
  • Childcare
  • Salary sacrifice options
  • Share incentive arrangements
  • Choice of a company car or additional salary and reimbursement of car expenses for business travel in your own car
  • Contributions to the additional costs of working at home

Other benefits including, for example, an annual function costing not more than £150 (including VAT) per head, or long service awards.

Most benefits are fully taxable, but some attract specific tax breaks. Combining benefits with a properly arranged salary sacrifice can mean considerable savings for both employer and employee.

If you get the package right, it can be very beneficial - especially for those with income of more than £100,000 who will lose their personal allowances. If you fall into this marginal category, please talk to us to find out how we can help.

Travel and subsistence

Site-based employees may be 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.

Employees working away from their normal place of work can claim a deduction for the cost of travel to and from their temporary place of work, subject to a maximum period.

Approved business mileage allowances - own vehicle

Vehicle
First 10,000 miles
Thereafter

Car/Van

45p

25p

Motorcycle

24p

24p

Bicycle

20p

20p

Pension scheme contributions

Employer contributions to a registered employer pension scheme or your own personal pension policies are not liable for tax or NICs.

Please be aware that while your employer can contribute to your personal pension scheme, these contributions are combined with your own for the purpose of measuring your total pension input against the annual allowance (£40,000 for 2014/15). Further information is provided in this guide.

Company cars

The company car continues to be an important part of the remuneration package for many employees, despite the increases in the taxable benefit rates over the last few years.

Employees and directors pay tax on the provision of the car and on the provision of fuel by employers for private mileage. Employers pay Class 1A NICs at 13.8% on the same amount.

This is payable by the 19 July following the end of the tax year.

The amount on which tax and Class 1A NICs are paid in respect of a company car depends on a number of factors. Essentially, the amount charged is calculated by multiplying the list price of the car, including most accessories, by a percentage. The percentage is set by reference to the rate at which the car emits carbon dioxide (CO2) - please see the table below.

The green choice

There are special reduced car benefit rates for environmentally-friendly cars - either those incapable of emitting CO2 or those emitting up to 75g/km.

Pooling your resources

Some employers find it convenient to have one or more cars that are readily available for business use by a number of employees. The cars are only available for genuine business use and are not allocated to any one employee. Such cars are usually known as pooled cars. HMRC's definition of a pooled car is very specific, but if a car qualifies there is no tax or NIC liability.

CO2 emissions (g/km) Appropriate percentage
Petrol %
Diesel %

1 - 75

5

8

76 - 94

11

14

95 - 99

12

15

100 - 104

13

16

105 - 109

14

17

110 - 114

15

18

115 - 119

16

19

120 - 124

17

20

125 - 129

18

21

130 - 134

19

22

135 - 139

20

23

140 - 144

21

24

145 - 149

22

25

150 - 154

23

26

155 - 159

24

27

160 - 164

25

28

165 - 169

26

29

170 - 174

27

30

175 - 179

28

31

180 - 184

29

32

185 - 189

30

33

190 - 194

31

34

195 - 199

32

35

200 - 204

33

35

205 - 209

34

35

210 and above

35

35

Car - fuel only advisory rates

Engine capacity
Petrol
Gas
Diesel

1400cc or less

14p

9p

11p

1401cc - 1600cc

16p

11p

11p

1601cc to 2000cc

16p
11p

13p

Over 2000cc

24p

16p

17p

Rates from 1 September 2014 and are subject to change. Note the advisory fuel rates are revised in March, June, September and December. Please contact us for any updated rates.

Mileage allowance vs. free fuel

Q. Would I be 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?

A. The rule of thumb answer is that you are more likely to be better off if your annual business mileage is high.

Q. Would I be 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?

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

Every case should be judged on its own merits, and considered from both the employees' and the employers' point of view. While cost is an important factor, it is not the only one. As an employee, using a company car removes the need to worry about bills or the cost of replacement. As an employer, running company cars allows you to retain control over what may, for your business, be key operating assets.

Private mileage

If your employer provides fuel for any private travel, there is a taxable benefit, calculated by applying the same percentage to the fuel benefit charge multiplier of £21,700.

You can avoid the car fuel charge either by paying for all fuel yourself and claiming the cost of fuel for business journeys at HMRC's fuel only advisory rates, or by reimbursing your employer for fuel used privately using the same rates.

What about a company van?

Many employers and employees have benefitted from significant savings by replacing company cars with employee-owned cars part-funded by mileage allowances at HMRC rates. Where a company vehicle is still appropriate, a van rather than a car is worth considering.

Unrestricted use of a company van results in a taxable benefit of £3,090, with a further £581 benefit if free fuel is also provided. The resulting tax bill can be up to £1,651.95, with an NIC bill for the employer of £506.60. Limiting the employee's private use to only home to work travel could reduce both figures to zero.

Case Study 5

Helen is an owner-director. For her company car she had chosen one with a list price of £25,785. The car runs on petrol and emits CO2 at a rate of 148g/km.

Helen's company is successful and she pays tax at 45%. Her 2014/15 tax bill on the car is therefore £2,553 (£25,785 x 22% x 45%). Helen's company will pay Class 1A NICs of £783 (£25,785 x 22% x 13.8%).

The company also pays for all of Helen's petrol. Because she does not reimburse the cost of fuel for private journeys, she will pay tax of £2,148 (£21,700 x 22% x 45%) and the company will pay Class 1A NICs of £659 (£21,700 x 22% x 13.8%).

The total tax and NIC cost is £6,143.

Furthermore, as well as paying for the fuel, the company will also need to pay a gross amount of over £8,870 to provide Helen with the funds to pay the tax.

When employers' national insurance is taken into account, the gross cost before tax relief of funding Helen's tax and the NIC liabilities will be over £11,536.

Future changes

For 2015/16 - There will be two new appropriate percentage bands for company cars emitting 0-50g/km CO2 (5%) and 51-75g/km CO2 (9%). The remaining appropriate percentages will be increased by 2% for cars emitting more than 75g/km CO2 to a new maximum of 37%.

For 2016/17 - All the appropriate percentages will be increased by 2% up to the maximum of 37%. The 3% diesel supplement differential will be abolished, making diesel cars subject to the same level of tax as petrol cars.

Follow-up - Contact us about…

  • Checking your PAYE code
  • Putting together an attractive and tax-efficient remuneration package
  • Cutting the cost of company cars, and reviewing the alternatives
  • Minimising NIC costs and understanding the tax implications of company cars