Tax and employment

Areas where our advice solves problems and adds value
  • Checking your PAYE code
  • Putting together an attractive and tax-efficient remuneration package
  • Obtaining an HMRC reporting dispensation to cut down on paperwork and compliance costs
  • Maintaining ‘adequate’ records of mileage and expenses
  • Funding pensions
  • Rewarding performance
  • Reducing NIC costs
  • Understanding the tax and NIC costs of company cars
  • Reducing the cost of company cars, and reviewing the alternatives
  • Replacing company cars with company ‘vans’

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.

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:

  • K you have income that is not being taxed any other way and this is worth more than your tax-free allowance
  • L includes standard tax-free personal allowance for those born after 5 April 1948
  • M marriage allowance - you have received a transfer of 10% of your partner's personal allowance 
  • N marriage allowance - you have transferred 10% of your personal allowance to your partner
  • P indicates that the employee is entitled to the lower single age allowance, i.e. an employee born between 6 April 1938 and 5 April 1948
  • S your income or pension is taxed at the Scottish rate of income tax
  • T your tax code includes other calculations to work out your personal allowance, for example it has been reduced because your estimated annual income is more than £100,000
  • OT your personal allowance has been used up, or you’ve started a new job and don’t have a form, P45, or you did not give your new employer the details they need to give you a tax code
  • BR all your income from this employment or pension is taxed at the basic rate (this rate often applies if you have more than one job or pension
  • D0 all your income from this employment or pension is taxed at the additional rate
  • NT you are not paying tax on this income
  • W1 or M1 at the end W1 (is week 1) and M1 is (month 1). This measn that your tax is based on what you are paid in the current pay period, not the whole 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 40% of your income in each month.

New category letters

If you employ someone aged over 16 but under 21 you'll have to choose 1 of the new National Insurance categories when assessing their secondary National Insurance contributions. It's the employer's responsibility to ensure the correct category letter has been applied based on the age and circumstances of the employee. The categories are:

  • M - not contracted-out standard rate contributions
  • Z - not contracted-out deferred rate contributions
  • Y - mariners not contracted-out standard rate contributions
  • P - mariners not contracted-out deferred rate contributions

Use our Payslip Calculator to check your payslip.

Cheap or interest-free loans

Where loans from an employer total more than £10,000 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 3%).

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, annual parties costing not more than £150 per head for the year, 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 must check that any expenses he reimburses to you are deductible for tax purposes. If this is the case, then the exepnses are exempt from tax and there is nothing reported to HMRC. If expenses are paid which are in excess of the tax relief that would be available for them, your employer will either tax these amounts through the payroll or may report them on form P11D, which will result in a tax demand. 

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 for up to 24 months.

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 tax impact 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.

If an employee works from home for at least part of the time, he or she may be paid an expense allowance of up to £4 a week (£18 a month) by the employer without having to produce evidence of expenses.

If travelling on work, personal incidental expenses may be paid tax-free up to £5 a day in the UK or £10 a day overseas. This is designed to cover personal expenses incurred while away from home such as newspapers and laundry that may not otherwise be allowable. Employees must not charge the expenses in their hotel bills in addition to the fixed rate allowance.

Pensions

Employer contributions to your pension scheme or your own personal pension policies are not liable for tax or NICs provided they do not exceed the annual allowance. The employee's contribution attracts tax relief but not relief from national insurance.

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 £40,000. 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.