TX-UK Module 2 – Income Tax Part 1

Table of Contents
The Scope of Income Tax .............................................................................................................................................. 2
RESIDENCE STATUS: ............................................................................................................................................... 2
The income tax proforma and Investment Income......................................................................................................... 4
THE INCOME TAX PROFORMA: .............................................................................................................................. 4
INVESTMENT INCOME: ............................................................................................................................................ 4
SAVINGS INCOME:.................................................................................................................................................... 5
DIVIDEND INCOME AND THE DIVIDEND ALLOWANCE: ....................................................................................... 5
ILLUSTRATION OF SAVINGS AND DIVIDEND ALLOWANCE ................................................................................ 5
TAX-FREE AND EXEMPT FORMS OF INCOME: ..................................................................................................... 6
Personal Allowances and Taxable Income .................................................................................................................... 7
Tax Rates and Banding to Calculate Income Tax Liability ............................................................................................ 9
Calculation of Income Tax Payable .............................................................................................................................. 11
Income from Employment - The Basics ....................................................................................................................... 12
PROFORMA: ............................................................................................................................................................ 12
Income from Employment – Vehicles ........................................................................................................................... 14
MILEAGE: ................................................................................................................................................................. 14
COMPANY CAR: ...................................................................................................................................................... 14
FUEL PROVIDED BY EMPLOYER: ......................................................................................................................... 16
COMPANY VAN: ...................................................................................................................................................... 17
Income from Employment – Accommodation .............................................................................................................. 18
INTRODUCTION: ..................................................................................................................................................... 18
NON JOB-RELATED ACCOMMODATION: ............................................................................................................. 18
JOB-RELATED ACCOMMODATION: ...................................................................................................................... 19
Income from Employment - Loans ............................................................................................................................... 20
Income from Employment - Other Benefits ................................................................................................................. 21
Income from Employment - Sundry Topics .................................................................................................................. 23
REAL TIME INFORMATION SYSTEM:.................................................................................................................... 23
PAYROLL DEDUCTIONS: ....................................................................................................................................... 23
EMPLOYMENT RELATED FORMS and PAYROLLING OF BENEFITS: ............................................................... 23
EMPLOYEE VS SELF-EMPLOYED: ........................................................................................................................ 24

1
THE SCOPE OF INCOME TAX
RESIDENCE STATUS:
General rule: An individual who is determined to be UK resident for a tax year is liable to UK tax on their worldwide
income whereas a non-resident individual is only liable on income arising in the UK.

There are three stages to determining whether an individual is UK resident or not:

1. Consider whether that individual is automatically resident overseas.

An individual would be determined to be automatically resident overseas if:

 they were UK resident in any of the last 3 tax years but physically present in the UK for less than 16 days in
the tax year under review;
 they were physically present for less than 46 days during the tax year, being the year in which they first come
to the UK;
 they were employed overseas on a full time contract and their days in the UK total less than 91 days for the
tax year.

Note: no further tests need to be considered if the circumstances for this person fall within any of these tests.

2. Consider whether the individual is automatically UK resident (if stage 1 didn’t produce an answer).

An individual would be determined to be automatically UK resident if:

 they spend at least 183 days in the UK during the tax year;
 their only home is situated in the UK;
 they are deployed in the UK on a full time contact.

Note: If the circumstances for this person fall within any of these tests, they are considered UK resident and no further
work is necessary.

3. Consider the number of ties that individual has to the UK compared to the number of days physically spent
in the UK (if no answer can be achieved from the first two stages).

There are five potential ties to UK:

 close family in the UK, like spouses and children under the age of 18;
 a house in the UK available for at least 91 days of the tax year;
 for those not resident in the UK in any of the 3 previous tax years, days in the UK totalling more than the
number of days spent in any other country;
 90 days or more in the UK in either of the previous 2 tax years;
 substantive work undertaken in the UK for 40 days or more during the tax year.

The tax legislation provides a table of how many days an individual can spend in the UK for a tax year
depending upon whether they were previously UK resident or not to match with these ties:

2
Note: The tax legislation tells us to count only those days when a person is present in the UK at midnight.

3
THE INCOME TAX PROFORMA AND INVESTMENT INCOME
THE INCOME TAX PROFORMA:
NON-SAVINGS
SAVINGS INCOME DIVIDEND INCOME
INCOME
(SI) (DI)
(NSI)
£ £
£

Trading Income X

Carried forward trade loss

(X)
relief

Employment Income X

Property Income X

Bank/building society interest X

Dividends from UK companies X

TOTAL INCOME X X X

Deduct:
Current year & carry back loss
(X)
relief*
(X)
Qualifying interest *

NET INCOME X X X

Personal Allowance* (X)

TAXABLE INCOME X X X

*deductions are firstly taken from NSI then SI and then DI

You need to ensure that you can reproduce this proforma quickly and efficiently in your exam. Do not include
all the lines if they are not relevant to the question - it just wastes time.

INVESTMENT INCOME:
The investment income can be split further between:

1. Savings income
2. Dividend income

The investment income is assessed on the ‘received basis’ so we only take into account the amounts actually received
during the tax year.

4
SAVINGS INCOME:
Tax Deduction at Source

There are a few sources of interest where tax is deducted at source but these are not examinable at TX level.
Therefore, for the purpose of the exam, all interest received should be treated as the full taxable amount, without the
taxpayer having yet paid any income tax on it.

Personal Savings Allowance

The personal savings allowance is £1,000 for a basic rate taxpayer, £500 higher rate taxpayer and nil for an additional
rate taxpayer. This is an amount of savings income which the individual can earn in the tax year but pay no tax on at
all.

DIVIDEND INCOME AND THE DIVIDEND ALLOWANCE:

Dividends received as considered as the taxable income amount and no further adjustment is required. An allowance
of £2,000 is currently available to all the taxpayers.

ILLUSTRATION OF SAVINGS AND DIVIDEND ALLOWANCE

NON-SAVINGS SAVINGS INCOME DIVIDEND INCOME
INCOME

Employment Income 20,570

Savings Income 10,000

Dividend Income 12,000

TOTAL INCOME 20,570 10,000 12,000

Personal Allowance (12,570)

TAXABLE INCOME 8,000 10,000 12,000

TAX:

NSI: 8,000 20% 1,600

SI: savings allowance 1,000 0% 0

balance 9,000 20% 1,800

DI: dividend allowance 2,000 0% 0

10,000 7.5% 750

TAX LIABILITY 4,150

Note: in this illustration the individual is a basic rate taxpayer as their taxable income is less than £37,700 (the basic
rate limit). They therefore get a savings allowance of £1,000. A higher rate taxpayer would only receive a savings

5
allowance of £500. The dividend allowance of £2,000 is available to all taxpayers regardless of the level of their
earnings.

TAX-FREE AND EXEMPT FORMS OF INCOME:

The main form of exempt income comes from investments made through ISAs.

There are two types of ISA that are relevant in TX:

 Cash ISA
 Stocks/shares ISA

Income from ISAs is exempt from income tax so in our income tax calculation we do not include this income.

There is a limit which permits a maximum investment during the tax year of £20,000 and this can be all cash or all
stocks and shares or a mixture of the two.

Other types of exempt income include:

 Prizes (including lottery and premium bond prizes)

 National Savings Certificate interest

Scholarships or educational grants

6
PERSONAL ALLOWANCES AND TAXABLE INCOME
The personal allowance for FA 2021 is set at £12,570 but this is gradually reduced to nil where a person’s adjusted
net income exceeds (ANI) £100,000.

Note: The personal allowance is reduced by £1 for every £2 of ANI above the income limit. Therefore a person with
ANI of £125,140 or more is not entitled to any personal allowance.

Adjusted net income is calculated as follows:

Total income per tax calculation X

Personal pension contributions (gross) (X)
Gift aid donations (gross) (X)
Adjusted net income (ANI) X

Personal pension contributions and gift aid donations are paid by individuals net of 20% tax. Therefore, when you are
calculating ANI you must gross up the payments by 100/80.

Illustration:

In 2021/22 James has total income of £130,000, he pays £8,000 into a personal pension and makes a donation to
charity under the gift aid scheme of £100.

His adjusted net income (ANI) would be:

Total income 130,000

Personal pension contributions (gross) £8,000 x 100/80 (10,000)
Gift aid donations (gross) £100 x 100/80 (125)
Adjusted net income (ANI) 119,875

His personal allowance would be restricted to:

Personal allowance 12,570

Restriction: (119,875 - £100,000)/2 (9,937)
Adjusted personal allowance 2,633

Marriage allowance is a possibility to transfer a fixed amount of the personal allowance (£1,260 for 2021/22) to a
spouse or registered civil partner. This amount is deducted from the tax calculation IT IS NOT added to the other
spouse/civil partners personal allowance.

Tax reduction = £1,260*20% = £252

Key rules:

1. If the recipient’s tax liability is less than £252 then the recipient’s tax liability is not reduced below zero;
2. A transfer is not permitted if either spouse or civil partner is a higher or additional rate taxpayer;
3. It is generally only beneficial where one party is not making full use of their personal allowance;

7
 4. The deadline for making the election is 4 years after the end of the tax year. Once an election to transfer has
been made, it remains effective until it is withdrawn or the conditions are no longer met.

Tax X
Less:
Marriage allowance (£1,260 x 20%) (X)
Interest relief (see notes on property income) (X)
Tax liability X

8
TAX RATES AND BANDING TO CALCULATE INCOME TAX
LIABILITY
There are differing rates of tax for differing types of income and also different tax bands. The tax bands which apply
to all types of income are:

1. The basic rate band - the normal rate of tax of 20% on income up to £37,700;
2. The higher rate band - a higher rate of tax for those with higher incomes, 40% on income between £37,700
and £150,000;
3. The additional rate band - a higher rate of tax of 45% for those with an income over £150,000 per year;
4. The special savers rate tax band - a government incentive for savers but only applies where the saving
income block of the tower (see below) remains low enough to fit at least partly in the savers rate band of
£5,000. Savings income falling within this band is taxed at a rate of 0%. If taxable non-savings income is
greater than £5,000 then none of this band will apply.

One way to work through each of these bands is to consider the income being built up like a tower of lego bricks:

Note: The ordinary tax rate for dividends is 7.5%, the upper rate is 32.5% and the additional rate is 38.1%.

Rules:

1. Any allowance which is set against income, such as the personal allowance, is usually used first against the
“Other/Earned” income (non savings income) layer and so only reduces savings or dividend income if the
lower layers are too low to fully make use of the allowance;
2. Whatever the taxable income at the end of the calculation, we apply the tax bands to the different types of
income in the same order - Other/earned income first, the savings income next and leaving the dividend
income to last, often referred to as “top slicing” of this type of income.

Tax is calculated once the income tax proforma has been completed and a taxable income figure produced.

Note: Taxable income is AFTER deduction of the personal allowance where applicable.

9
Illustration

Nicola has the following taxable income:

NSI £ SI £ DI £

Net income 120,000 20,000 10,000

Personal allowance NIL

Taxable income 120,000 20,000 10,000

Tax calculation:

NSI:
£37,700 x 20% £7,540
(£120,000 - £37,700) x 40% £32,920

SI:
£500 x 0% £0
£19,500 x 40% £7,800

DI:
£2,000 x 0% 0
£8,000 x 7.5% £600

Tax liability £48,860

Notes:

Nicola’s ANI is above £125,140 so she is not entitled to a PA deduction

Nicola is entitled to both the savings allowance and the dividend allowance but as she is a higher rate taxpayer her
savings allowance is restricted to £500.

10
CALCULATION OF INCOME TAX PAYABLE
The income tax liability is the total amount of tax which HM Revenue and Customs expects to collect from this
individual for the year.

Income tax payable is the final amount of tax which the individual still needs to pay over to HM Revenue and
Customs, under the self assessment system, after taking account of tax deducted at source on all types of income. It
is calculated as follows:

Income tax liability - Tax paid at source = Income tax payable

There are different types of income:

1. Income from employment. It is subject to tax at source under the PAYE scheme, because employer makes
a deduction from salaries before paying them on to the employee;
2. Income from self employment. It is not subject to tax at source for exam purposes but in reality there are
certain trades where tax is effectively deducted at source;
3. Property income. It is not subject to tax at source;
4. Savings and dividend income. These are not taxed at source.

Illustration:

Pete has employment income of £60,000 and has had PAYE deducted of £9,700. He has no other income.

His tax payable/repayable would be:

Employment income 60,000

Net income 60,000

Personal allowance (12,570)

Taxable income 47,430

Tax:
NSI:
37,700 x 20% 7,540
9,730 x 40% 3,892

Tax liability 11,432

Tax deducted at source: PAYE (9,700)

Tax payable 1,732

In this illustration, Pete is required to make a payment of tax of £1732 to HMRC.

11
INCOME FROM EMPLOYMENT - THE BASICS
PROFORMA:

1. Salary - employment income is calculated on what is called the received basis - rather than thinking about
what should have been received during a tax year, we look at what actually has been received in that time
and take this to be the salary for the year.
2. Bonus and commission - the rule is that the date the bonus (or commission) is treated as being received in
the earliest of:

(i) when it is actually received;

(ii) when the employee was entitled to receive it

Note: The period to which the bonus (or commission) relates is actually irrelevant

3. Benefits:
a. Tax-free or exempt benefits. These are things which an employer can provide to or pay for an employee but
which are not counted in any way as part of that employee’s income. The most common examples would be:
 Parking provided by the employer, either using an on-site park or a “paid for” space;
 Workplace charging points for electric or hybrid cars;
 Eye care testing paid by the employer;
 Relocation expenses of up to £8,000 to cover selling and transportation costs;
 Staff welfare facilities such as a canteen, gym or nursery;
 Pension contributions paid by the employer;
 Pension advice available to all employees up to £500 per tax year (greater amounts are taxable in full)
 Use of home as office contributions from the employers of up to £6 per week (to cover light and heat etc
whilst working at home);
 One mobile phone provided by the employer for both business and personal calls;

12
  Overnight personal expenses paid by the employer whilst working away from home. Up to £10 per night
is tax free if working overseas and up to £5 per night if working elsewhere in the UK (costs that are only
being incurred because you are away from home for work);
 Training courses;
 Christmas and other staff parties provided the cost is less than £150 per person per year;
 Counselling;
 Up to £500 pa for recommended medical treatment to assist with a return to work;
 Use of workplace charging points for electric or hybrid cars;
 Expenses incurred in providing employee with 1 health screening assessment and 1 medical check up in
any year;
 Long service awards where the service is not less than twenty years and the cost does not exceed £50
for each year of service;
 Work to home travel where employee is required to work later than usual on irregular occasions;
 Bicycle safety equipment if the main use of the bicycle is to cycle to work;
 Subscriptions to professional bodies.

Note: Any combination or indeed all of these could be paid for you by your employer without anything being included
as part of your employment income.

b. Other benefits provided by the employer are potentially chargeable to income tax.

4. Reimbursed expenses - anything reimbursed by the employer is added into employment income as an
additional receipt but given the name we then need to consider whether these were actually allowable
expenses. An expense can be deducted from employment income provided it is incurred wholly, exclusively
and necessarily in their performance of our employment duties.

5. Other allowable deductions from employment income would include:

 Donations made to charity through a payroll deduction scheme;
 Employee contributions to an occupational pension plan;
 Subscriptions paid by an employee to a relevant professional body;
 Deficits on a mileage allowance.

13
INCOME FROM EMPLOYMENT – VEHICLES
There are various ways in which employers can help employees in relation to their travel if they need a vehicle for
both business and personal purposes:

MILEAGE:
This only relates to the scenario where the car is that of the employee (owned or leased) and the employee is covering
the day to day running costs of the car, such as the insurance, fuel and tax.

Approved rate: 45p per mile for the first 10,000 miles in the year, and then 25p per mile thereafter.

Key concern: The employer should only reimburse for business miles that include miles travelled:

 Between the employee’s normal place of work and a temporary site such as a customer or supplier;
 Between home and a temporary site such as a customer or supplier;
 Between home and a temporary place of work (for a period of less than two years).

Remember: The journey between home and the normal place of work can never be considered business in nature.

Note: Amounts reimbursed to an employee using the approved rates are tax free, so we would not need to include
the reimbursed amount as income, nor would we deduct any allowable expenses.

Amount reimbursed > Tax-free amount Extra employment income

Amount reimbursed < Tax-free amount Allowable expense

COMPANY CAR:
This relates to the scenario where the car belongs to the employer but he allows the employee to use it not just to
undertake business journeys, but also to take it home at the end of the working day and use it for personal journeys
as well.

Company car benefit = List price of the car * %

The list price of a car is the result of three things:

1. The dealer price of the car when new;

2. The cost of any extras;
3. Any capital contribution paid by the employee (capped at a maximum deduction of £5,000).

A percentage (%) is based on the CO2 emissions of the car:

14
 Hybrid-electric motor cars with CO2 emissions between 1-50g - use See electric range
the electric range to determine car benefit % table below
Fixed percentages: 51-54g 14%

55g 15%

55g+ 15 + (Calculate*)
Calculated
For diesel cars (not meeting RDEC2) Add 4%
percentages:
Maximum 37%

*Calculated percentage = (CO2 - 55)/5

Notes:

The CO2 figure entered is rounded down to the nearest 5 or 0.

Diesel cars that meet the RDEC2 standard do not have a 4% surcharge.

Remember:

1. Time apportioning is necessary if the car is available for only part of the year;
2. If the employee makes regular contributions towards private use of the car (rather than capital contributions),
these are deducted from the benefit calculated.

Illustration 1:

On 6 October 2021, James is provided with a diesel car that does not meet the requirements of RDEC. It’s list price
is £22,000, it has CO2 emissions of 120g/km and James contributed £6,000 towards the cost of the car.

Calculate the company car benefit for 2021/22.

Calculate the %:

(120 - 55)/5 = 13.

Add on the base percentage of 14 plus the diesel supplement of 4 and the % is:

13 + 15 + 4 = 32%

List price less capital contribution (max £5,000) = £22,000 - £5,000 = £17,00

£17,000 x 32% x 6/12 = £2,720 (remember that the car was only provided for half of the year).

Electric cars

Electric cars with 0g/km CO2 emissions are taxed at 1%.

For emissions between 1g/km and 50g/km - use the range table below.

15
For emissions of more than 50g/km - use the normal company car benefit rules above.

Range %

130 miles or more 0%

70 to 129 miles 4%

40 to 69 miles 7%

30 to 39 miles 11%

Less than 30 miles 13%

Note: These rules are effective from 6/4/2020. You will not be tested on the old rules. In the exam, assume all cars
were registered on or after 6/4/2020.

Illustration 2:

Peter is provided with an electric car from 6/4/2021. It has a range of 97 miles, CO2 emissions of 15g/km and the car
cost the company £32,000. The list price is £35,000.

Calculate the taxable benefit:

According to the range table the % will be 4%.

The list price is always used and not the discounted price.

So, £35,000 x 4% = £1,400

Peter will be taxed on an additional £1,400 during the tax year 2021/22.

Note: the % tables will be given to you in the exam.

FUEL PROVIDED BY EMPLOYER:

This relates to the situation where the employer pays for all of the fuel for the car, to cover both business and personal
journeys. We calculate a car fuel benefit as follows:

Fuel benefit = Base level * %

Base level for 2021/22 = £24,600

Percentage (%) - the same percentage used for the company car calculation.

Remember:

1. Time apportioning is necessary where the fuel is provided for part of the year;
2. No deduction from the benefit is allowed for any contributions the employee makes towards their private fuel;
3. The calculation of a car fuel benefit is not affected by how many private journeys the employee makes;

16
 4. Contributions towards some of the private fuel has no effect unless there is no private fuel provided by the
employer at all.

COMPANY VAN:
In this situation we simply use a given van benefit figure of £3,500 per annum for 2021/22.

Remember:

1. Time apportioning is necessary for the van benefit where the employer only provides the van for part of the
year;
2. A deduction from the benefit is allowed for any contributions the employee makes towards their private use of
the van;
3. If the only private use is minimal and incidental to business use, no benefit is included as employment income;
4. Employers sometimes pay for the fuel for vans in the same way but the benefit for this is simply given as £669
per annum for 2021/22;
5. Time apportioning is necessary for the van fuel benefit where the employer only provides fuel for part of the
year;
6. No deduction from the benefit is allowed for any contributions the employee makes towards their private fuel.
7. Van’s with zero CO2 emissions have a zero benefit charge.

17
INCOME FROM EMPLOYMENT – ACCOMMODATION
INTRODUCTION:
It is important to understand whether the accommodation is job-related or non-job related. The accommodation is
qualified as job-related if it satisfies one of the following conditions:

1. It is necessary for the employee to live in this specific property to be able to properly perform their duties, eg
a lighthouse keeper; or
2. It is customary within the industry that the employee works for accommodation to be provided, eg a Vicar; or
3. The accommodation is necessary as there is some special threat to the personal security of the employee as
a result of their employment, e.g. the Prime Minister.

NON JOB-RELATED ACCOMMODATION:

Where the accommodation is non-job related, there is a basic pro forma used to calculate the value of the benefit
which arises:

Basic charge X
Additional charge X
Ancillary services X
Total benefit £X

1. The basic charge is the higher of:

a. The annual value of the property,
b. The rent paid by the employer for the property.

2. The additional charge, also called the further or expensive property charge, is calculated as follows:

Additional charge = (X - 75,000) x official rate of interest

The official rate of interest = 2% for the current tax year;

X - the amount which can be determined by looking at two parts:

a. To decide whether to start with the original purchase price or the market value at the date the employee
first moves into the property:

18
 b. To think about any capital improvements made to the property. Rule: We only add into “X” capital
improvements completed before the start of the tax year we are working on.

Note: Additional charge will only apply if the property originally cost the employer at least £75,000 to buy
(i.e. it is not being rented).

3. Ancillary services are additional items or costs covered by the employer as well as merely providing the
property for the employee to live in. There are two elements here to calculate:

a. Use of furniture (if paid for by employer):

Use of furniture = 20% x market value of furniture when made available

b. Household running expenses. Anything which the employee would normally pay for themselves in relation
to their home and instead being paid for by the employer are included here (gas, electric, water or even
the council tax charges).

Remember: The accommodation benefit is time apportioned where the property is only available for part of the year
and we are allowed to deduct employee contributions from the value of the benefit.

JOB-RELATED ACCOMMODATION:
If the accommodation qualifies as job-related, the basic and further charge do not apply - they are exempt. The only
potential benefit for job-related accommodation is in relation to the ancillary services, but they are capped at a
maximum of 10% of employment income.

ILLUSTRATION:

Jack was provided with accommodation by his employer for the whole of the current tax year. The property was
purchased by his employer 10 years ago when its market value was £150,000. When Jack moved into the property
the market value was £210,000. The annual value of the property is £3,500 and Jack's employer paid household
running expenses of £2,100. Jack paid his employer £100 per month for use of the property.

The taxable benefit would be:

Annual value £3,500

Additional charge (£210,000 - 75,000) x 2% £2,700

Household running costs £2,100

Contributions made by Jack (£100 x 12months) (£1,200)

Taxable benefit £7,100

19
INCOME FROM EMPLOYMENT - LOANS
There are situations when an employer loans money to an employee and either charges them no or a low-rate of
interest.

Exemption: If the value of the loan remains below £10,000 for the whole of the tax year, no benefit is calculated as it
is exempt.

Note: If the value of the loan exceeds £10,000 at any point in the tax year, a benefit is calculated for the whole year
not just the period where the balance is greater than the limit.

The following formula is used in order to calculate the benefit:

Loan value * official rate of interest

Official rate of interest for the current tax year = 2%.

There are two potential methods to calculate the loan value:

a. The average method - a simple average loan balance calculated as:

Balance at start of tax year/when first made (if mid-

year)
+ Balance at end of tax year/when repaid (if mid-year)
Average loan balance =
2

b. The precise or accurate method - we calculate the balance on the loan at the end of each month and charge
interest at a monthly equivalent rate for that month:

Average loan balance = Loan balance at the end of each month * 2% * 1/12

Remember:

1. We time apportion if the loan does not exist for the whole tax year;
2. We can deduct any interest which the employee pays to the employer.

20
INCOME FROM EMPLOYMENT - OTHER BENEFITS
There are some other benefits which have specific calculation methods:

1) Employers help with medical costs. There are two possible scenarios here:

a) The employer pays for membership of a medical insurance scheme for the employee (and members of the
employee's family as well). If this is the case, this is a taxable benefit but is calculated as simply the cost to the
employer;
b) The employer pays all or some of the cost of the employee receiving medical treatment to help them return to
work quicker:

Amount paid by employer < £500 Exempt, no benefit is charged

Amount paid by employer > £500 Total cost is a benefit

2) Employer allows an employee to make use of an asset owned by the employer for private purposes (except
for car, van, living accommodation). For other assets, we use the “Use of” method to calculate the benefit:

Benefit = 20% * Market value when made available to employee

Remember:

1) The benefit is time apportioned where the asset is only available for part of the year;
2) We are allowed to deduct employee contributions from the value of the benefit.
Note: If a bicycle loaned to employees to travel to and from work or for business purposes, this is an exempt
benefit.

3) Employer allows an employee to take ownership of the asset. If this is the case, the benefit is
calculated as the higher of:

a) Cost to employer less “use of” benefits already taxed less any employee contribution;

Original cost of asset X

Benefits already taxed for (X)
previous ‘use of’ asset
Employee contribution (X)
Total X

21
 b) Market value of asset when gifted less any employee contribution.

Market value when gifted X

Employee contribution (X)
Total X

Note: For any other benefits provided by an employer where no specific calculation method exists, the cost to employer
principle would be used, and both of the general principles of time apportioning and deducting employee contributions
would apply.

22
INCOME FROM EMPLOYMENT - SUNDRY TOPICS
REAL TIME INFORMATION SYSTEM:
HM Revenue and Customs require employers to use a RTI (Real Time Information) system to send details to them
every time an employee is paid.

There are two key advantages to this “real time” reporting:

1. HM Revenue and Customs have information about deductions that the employer has taken, so that they can
chase money if it is not paid over when due;
2. HM Revenue and Customs have information about the earnings of any given individual so that this information
can be used by other government offices.

PAYROLL DEDUCTIONS:
The employer is required to deduct income tax and employee’s national insurance from the payment for the work
done, which they then pay on to HM Revenue and Customs on behalf of the employee.

When calculating income tax, the income from all sources is accumulated for tax purposes. Employers use PAYE
codes for each employee. The code is calculated as follows:

Personal allowance X
Allowable expenses expected to be paid X
Taxable benefits estimated (X)
Adjustments for tax underpayments X/(X)
Total X

Taxable benefits < (Personal allowance + Allowable expenses) Code ends with L

Taxable benefits > (Personal allowance + Allowable expenses) Code starts with a K

EMPLOYMENT RELATED FORMS and PAYROLLING OF BENEFITS:

It is important to be aware of the key employment related forms:

1. P60 - shows the employee their gross earnings for the year and how much tax and national insurance has
been deducted. Deadline is 31 May;
2. P11D - shows the value of benefits provided to the employee. Employers are required to give a copy of this
form to the employee by the 6 July after the tax year if any benefits were provided. Alternatively the employer
could apply to HMRC to tax the benefits being provided to the employee via the PAYE system instead of
reporting them on the P11D. This is known as payrolling of benefits. The employee will therefore pay tax on
the benefits during the tax year and doesn’t then have to report them on their tax return. The employer
therefore would not need to include the benefit on a P11D.
23
 3. P45 - produced when an employee ceases to be employed (for whatever reason). It provides the necessary
information for the new employer about earnings and tax deducted to date for the tax year.

EMPLOYEE VS SELF-EMPLOYED:
If an individual claims to be self-employed, they regularly submit an invoice for the hours they worked and request
payment in full without any deduction of tax or national insurance.

HM Revenue and Customs requires the employer to assess whether that person really is self employed or they should
be treated as an employee by looking at seven factors:

1) Conditions of pay;
2) Integral position;
3) Risk;
4) Control;
5) Legal rights;
6) Equipment;
7) Substitute.

24