Tax Essentials: Working for Others

Practical tax tips to guide you through the tax system and help you plan to minimise your liability.

Please use the guide to help you identify planning opportunities, pitfalls to avoid and areas where you may need to take action and then contact us for further advice.

The rules, rates and allowances in this guide relate to the 2024/25 tax year and these may be different for other tax years.

Working for others

Few avoid working for others at some time in their life and most will have encountered the PAYE system operated by employers to collect the income tax and national insurance contributions (NICs) due on wages and salaries.

The tax code

Ensuring the right amount of tax is taken relies on a PAYE code issued by HMRC and based on information given in a previous self assessment return or supplied by the employer. The employee, not the employer, is responsible for the accuracy of the code.

Code numbers try to reflect both an individual’s tax allowances and reliefs and also any tax they may owe on employment benefits and in some cases other types of income. For many employees things are simple. They will have a set salary or wage and only a basic personal allowance. Their code number will be 1257L and the right amount of tax should be paid under PAYE. However, for those who are provided with employment benefits, the code number is generally adjusted to collect the tax due so that there are no nasty underpayment surprises. HMRC may also use the code to collect tax on untaxed income, tax on dividends, the high income child benefit charge and tax owing for an earlier year.

For Scottish taxpayers a letter ‘S’ is included in the tax code and denotes that the Scottish income tax rates apply to an employee’s pay, rather than the rates and bands which apply across the rest of the United Kingdom.

For Welsh taxpayers a letter ‘C’ is included in the tax code.

With so many complications and some guesswork involved, getting the code exactly right can be difficult and the right amount of tax will not always be deducted.

Tax Tip
If you are unsure about your code and are anxious not to end the tax year under or overpaid, then you should have it checked. HMRC may update an individual’s tax code during the tax year to reflect changes to benefits and to collect tax underpayments. Please talk to us about getting your tax code checked.

Benefits

The range of benefits available will vary significantly depending on the type of employment but can be a key part of a remuneration package. Some are completely exempt from income tax. Benefits can also give an NIC saving for the individual.

Valuation

The general rule is that the value of the benefit is the cost to the company although there are special rules in respect of some benefits. Where a benefit is taken rather than an alternative cash option, the taxable value of the benefit is the higher of the cash foregone or the taxable value under the normal benefits rules. Contact us for the correct valuation of benefits.

Company cars

Employer-provided cars, commonly known as company cars, remain a popular benefit, despite the tax charge they give rise to.

The charge on cars is generally calculated by multiplying the list price of the car by a percentage which depends on the CO2 emissions (recorded on the Vehicle Registration Document) of the car. For hybrid cars with emissions not exceeding 50g/km, the percentage is determined by the electric mileage.

The percentage applicable may be obtained from HMRC here.

Example
David has a company car, a Hyundai Ioniq, which had a list price of £28,395 when it was provided new on 6 April 2024. The CO2 emissions are 26g/km and its electric range is 39 miles. David's benefit in kind for 2024/25 is £3,407, being £28,395 x 12%.

Fuel for private use

A separate charge applies where private fuel is provided by the employer for a company car. The charge is calculated by applying the same percentage figure used to calculate the company car benefit to a fixed figure which for 2024/25 is set at £27,800. No fuel benefit applies to an electric car.

Tax Planning
The fuel benefit charge can be expensive. It may be cheaper for the employee to pay for all the fuel and to reclaim from the employer the cost of business miles driven in a company car based on a specific log of business journeys undertaken.

Vans

Where employees are provided with a van and the only private use of this is to travel to and from work (including any incidental private use), then no taxable benefit should arise. If there is private use beyond this, there is a benefit of £3,960 for 2024/25 and an additional £757 if fuel is provided for private as well as business journeys. In order to avoid this charge, it is advisable to have a formal written policy, detailed mileage logs and make use of vehicle tracker records. These will support the limited private use of the van and may avoid problems with HMRC in the future.

Medical insurance

The employee is taxed on the amount of the premium paid by the employer.

Home and mobile phones

There is no benefit on the provision of a company mobile phone even where it is used privately. However, this is limited to one phone per employee.

Where home telephone bills are paid by the employer, the amount paid will be taxable. The employee may make a tax deduction claim for the cost of business calls only but not the line rental.

Cheap or interest free loans

If loans made by the employer to an employee exceed £10,000 at any point in a tax year, tax is chargeable on the difference between the interest paid and the interest due at an official rate – currently set at 2.25% per annum. An exception applies for certain qualifying loans – please contact us for information.

Tax Tip
The £10,000 limit on tax free loans is an attractive perk for many employees. Even for tax-free loans over £10,000, the tax charge may still be more attractive than taking out a loan at current interest rates.

Childcare costs

Childcare costs paid for by an employer may be exempt from both income tax and NICs. This applies to a place in an employer operated nursery and to Employer Supported Childcare as long as the claimant entered the Scheme before 4 October 2018. In the latter case, the exemption is limited and excess amounts are subject to tax and NICs. Employer Supported Childcare is now closed to new claimants and has been replaced by Tax-Free Childcare.

Employees who qualify for both schemes are able to choose which scheme they wish to use but families cannot benefit from both schemes at the same time.

Pension contributions

Contributions by an employer to a registered pension scheme are generally tax and NICs free for most employees.

Expense payments

An employee can claim tax relief for expenses which are incurred wholly, exclusively and necessarily for business purposes. The main types of expenses are travelling to places for work (but not the normal place of work) and overnight accommodation.

Reimbursed expenses

An employer would normally reimburse an employee for business expenses. Employers are no longer required to report reimbursed tax deductible business expenses and therefore employees do not need to claim tax relief on these expenses.

Mileage claims

Many employers pay a standard rate of mileage to all employees who use their own cars for business journeys. HMRC sets statutory rates for business mileage which are 45p for the first 10,000 miles in a tax year and 25p thereafter.

If the employee is paid for business miles at less than the statutory rates, tax relief is available on the difference. If, however, the employee is paid at more than these rates then the excess is taxable.

If you are paid less than the statutory rates to use your own car for business purposes remember to claim a deduction on your return or write to HMRC to make your claim.

Example
In 2024/25 Michael travels 14,100 business miles in his own car and is paid 32p per mile by his employer.
Michael can claim tax relief on an additional amount of £1,013 ((10,000 x 45p) + (4,100 x 25p)) - (14,100 x 32p).

For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.

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Juliet Morris Director of Redshield Chartered Accountants
Jenny Dinnage Redshield Chartered Accountants Director
Rachel - an employee of Redshield Chartered Accoutants
Emma is an employee of Redshield Chartered Accountants
Amanda is an employee of Redshield Chartered Accountants

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Juliet Morris Director of Redshield Chartered Accountants
Jenny Dinnage Redshield Chartered Accountants Director
Rachel - an employee of Redshield Chartered Accoutants
Emma is an employee of Redshield Chartered Accountants
Amanda is an employee of Redshield Chartered Accountants

Redshield Chartered Accountants Team

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We’ll make your accounting easier.

Free, no obligation call. Call us today:

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