Tax rates and payment
Employment income is charged to both income tax (as ‘general’ income) and to Class 1 National Insurance Contributions. Tax and NIC are normally paid by the employer through the PAYE system, but an employee whose tax is not fully paid should complete a tax return and settle the liability as described in Personal Taxation.
If the tax underpaid is up to £3,000 and the 2012/13 tax return is submitted by 31 October 2013, or e-filed by 30 December 2013, the underpayment can be settled through PAYE for 2014/15 rather than being collected on 31 January 2014.
Class 1 NIC rates 2012/13
Employers and employees both contribute at rates dependent on the level of earnings during a weekly, monthly or annual earnings period.
LEL: lower earnings limit
ST: secondary threshold
PT: primary threshold
UAP: upper accrual point
UEL: upper earnings limit
No NIC are payable by employee or employer on earnings up to the PT (employees) or ST (employer).
Earnings between the LEL and the PT must be reported by the employer, and the employee receives credit towards the State Pension, but no employee NIC are payable.
Rates of NIC on earnings above the PT/ST depend on whether the employee is within the State Second Pension (S2P), or whether the employee is ‘contracted out’ as a member of a final salary (FS) pension. It is no longer possible to contract out using a money purchase scheme.
PT/ST – UAP
UAP – UEL
A person with more than one employment can defer the payment of some employee NIC until after the end of the tax year. The total amount payable is then checked and limited so the full 12% rate is only applied to income between the PT and the UEL.
Employee benefits are usually valued at a ‘cash equivalent’ and are then charged to income tax on the employee and Class 1A NIC (at 13.8%) on the employer. The cash equivalent is generally based on the cost to the employer of providing the benefit, but the following are charged according to a statutory formula.
Cars provided by the employer: a percentage of the original list price of the car, depending on the CO2 emissions rating of the car.
5% of list price
10% of list price
11% of list price
max 35% benefit
For diesel cars add 3% (min. is 8%, max. still 35%). There is no discount for the level of business mileage or the age of the car.
Fuel provided by the employer for private use in a company car is charged without reduction for contributions unless all private fuel is paid for by the employee, in which case there is no benefit.
To calculate the taxable amount, the percentage used to calculate car benefit is applied to a standard figure of £20,200.
Vans provided by the employer for an employee’s use are charged at a flat rate of £3,000. If fuel is provided as well, an additional £550 is charged. If private use of a van is restricted to home-to-work travel, there is no tax charge.
Loans of money that exceed £5,000 atany point in the tax year are charged on the excess of the official rate (4% since 2010/11) over any interest actually paid by the employee to the employer.
Use of assets is charged at 20% of the original cost of the assets to the employer, or the value when first made available to the employee, less any amount paid by the employee for private use.
Main exempt benefits
Many employee benefits are not charged to tax. A full list cannot be given here, but some of the principal ones are:
electric car or van with no CO2 emissions
providing one mobile phone, even with private use
subsidised meals available to all employees in a staff restaurant or canteen (subject to conditions)
the provision of ‘green transport’ such as works buses or the use of a bicycle for commuting
Exempt mileage allowances: employee’s own car
|First 10,000 business miles||Extra miles||Each passenger|
Exempt fuel-only allowances: company car
|Engine cc||Petrol||LPG||Engine cc||Diesel|
1400cc or less
1600cc or less
1401cc – 2000cc
1601cc – 2000cc
Rates usually change several times a year (1.3.12 rates shown).
Other exempt payments to or for employees
mileage allowances of up to 24p per mile for business use of the employee’s motorcycle or 20p per mile for a pedal cycle
contributions to registered pension schemes within prescribed limits
payments of up to £5 a night for ‘personal incidental expenses’ when staying away (£10 if abroad)
Employee share schemes
Generally, employees are charged to income tax on the value of shares that they are given or issued by their employer, less any amount paid for the shares. This applies to ‘free shares’ and to shares acquired under option schemes. NIC are also charged if the company is quoted, or the shares can be easily sold.
If the employer operates one of the following ‘HMRC-approved’ schemes, the tax charge may be eliminated, reduced or deferred.
Share incentive plans (SIP)
‘free shares’ to £3,000pa
‘partnership shares’ (employee buys with pre-tax salary) to max £1,500pa; employer can ‘match’ with up to 2 more for each one purchased
shares left in the scheme for at least 5 years: no income tax or CGT on the value when they leave the scheme
Enterprise management incentives – qualifying trading companies (fewer than 250 employees) can grant options to buy up to £120,000 (Budget 2012 proposes to increase this to £250,000) worth of shares to selected employees.
Approved company share option plans – share options to buy up to £30,000 of shares can be granted to employees.
Approved savings-related share option plans – employees contribute to a Save As You Earn plan (max. £250 a month) to save the money needed to exercise options.
With approved option schemes, the employee pays CGT on sale of the shares rather than income tax/NIC on exercising the options. The CGT charge is likely to be smaller and later than the IT/NIC.