Tax and the Employee

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 your 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.

Expense payments

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 Tip
Check whether your employer has a dispensation. If not you will need to make entries on your tax return to:

record the benefits and expenses as income
claim a deduction for the business element of the expenses.

If you do not receive a tax return you should write directly to the Revenue to make a claim.

Mileage claims

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 set out in the legislation and since 6 April 2002 have been 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.

Example
Dave 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.

Dave’s tax relief claim is:	£
4,100 miles @ 40p	1,640
Less: actually paid 4,100 @ 32p	(1,312)
	£328

Repayment due:
£328 x 22% = £72.16

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 Tip
Remember to check your mileage allowances and write to the Revenue for your repayment of tax if appropriate.

Company cars

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 145 gm/km in 2004/05) are charged at 15% of the list price building up to a maximum of 35% for high emission cars (245 gm/km and above in 2004/05).

Most diesel cars suffer a 3% supplement although the maximum charge cannot exceed 35%. Discounts apply to certain environmentally friendly cars. For cars registered before 1 January 1998, the charge is based on engine size.

Tax Tip
An increasing number of new diesel cars meet the Euro IV standard which means that they escape the 3% supplement.

This may affect your decision when changing company car.

CO₂ emissions are recorded on the Vehicle Registration Document (V5).

Private petrol

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).

With effect from 6 April 2003, the charge is calculated by applying the percentage figure used to calculate the company car benefit to a fixed figure which for 2004/05 is set at £14,400.

Tax Tip
If 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.

Medical insurance

The provision of private medical insurance is a taxable benefit.

Use of company assets

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.

Phones

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.

Social functions for employees

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.

Cheap or interest-free loans

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.

National insurance

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 Tip
Contributions 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.