Certain benefits received by employees under Employment Income rules are deemed EXEMPT BENEFITS and are not subjected to income tax.
However, taxable employment benefits must be included within Employment Income on an individual’s INCOME TAX COMPUTATION. The amount assessed is usually the COST to the employer of providing the benefit. Although this can be the MARGINAL COST where the employer makes the goods or provides the service in the course of business.
If the accommodation is job-related there is no taxable benefit.
Otherwise, living accommodation provided to an employee is a taxable benefit. The benefit assessed is the HIGHER of:
- the accommodation’s ANNUAL VALUE and
- the rent actually paid by the employer.
The benefit is reduced by any contribution paid by the employee.
There is an ADDITIONAL benefit assessed if the cost of providing accommodation is more than £75,000. The benefit is calculated as;
(COST OF PROVIDING ACCOMMODATION – £75,000) * OFFICIAL RATE OF INTEREST (2.25%)
If the employer bought the accommodation more than 6 years prior to providing it to the employee then the market value of the property when provided to the employee is used in the calculation rather than the purchase price.
Use of Assets
Amount assessed is the HIGHER of:
- 20% * market value of the asset when first provided
- rental paid by the employer (if rented).
If for example an employer provided the use of a TV for the employee which cost £1,000 when bought. Then the employee would be assessed on £200 each year (20% * £1,000) that the employee used the TV.
Gift of Assets
If an employee is gifted a new asset, he is taxed in the cost of the asset.
But if, the employee is gifted an asset that he has previously used, he is taxed on the HIGHER of;
- The market value of the asset when given to him, and
- The Tax Written Down Value (TWDV) ie. the market value when first provided less the benefit assessed on the employee while using the item.
Where a motor car or van is gifted, the assessable benefit is simply the market value of the motor car or van.
Approved Mileage Allowance – Employees Using Their Own Car
EMPLOYEES using their OWN MOTOR VEHICLE for BUSINESS need to use the APPROVED MILEAGE ALLOWANCE to calculate if any taxable benefit has been received from their employer due to any mileage allowance paid to them by their employer.
EMPLOYEES are allowed to receive a payment from their employer of 45p per mile for the first 10,000 mile travelled on business and 25p per mile for distances travelled above 10,000 miles.
This means that if you travel 1,000 miles in a tax year for business and receive 50p per mile from your employer, then if the employer reimburses the employee £500 (1,000 * 50p) then £50 (£500 – (1,000 * 45p)) will be employment income for the individual and will be assessable on their income tax computation.
If however, the individual does NOT get reimbursed by their Employer for their business travel, then £450 (1,000 * 45p) is an ALLOWABLE DEDUCTION against their Employment Income.
If the MILEAGE ALLOWANCE is received for travelling TO AND FROM WORK then this would be TAXABLE INCOME unless travelling TO AND FROM WORK in reference to a TEMPORARY WORKPLACE (ie < 2 YEARS).
Company Car Benefit – Employees Provided With A Company Car
Where Employees are provided with the use of a company car, then a taxable benefit needs to be included in the Employment Income on the individuals Income Tax Computation.
To calculate the taxable benefit a PERCENTAGE RATE is multiplied by the LIST PRICE of the vehicle (NOT the cost to the EMPLOYER).
The PERCENTAGE RATE will depend on which type of car is provided. The categories are;
- Electric (zero CO2 emissions)
ELECTRIC CARS (ZERO CO2 EMISSIONS)
0% PERCENTAGE RATE is applicable.
HYBRID CARS ( 1 AND 50 G/KM CO2 EMISSIONS)
It depends on the battery range of the hybrid.
|BATTERY RANGE||PERCENTAGE RATE|
|130 MILES OR MORE||0%|
|LESS THAN 30 MILES||12%|
ANY vehicle with CO2 EMISSIONS over 50 G/KM the percentage rate is as follows;
- 51 to 54 G/KM: 13%
- 55 G/KM: 14%
For cars with CO2 EMISSIONS over 55 G/KM, then this is the BASE LEVEL of CO2 EMISSIONS and the base percentage of 14% is increased by 1% for every COMPLETE 5 G/KM by which the vehicle exceeds 55 G/KM.
But this is capped at a MAXIMUM PERCENTAGE RATE of 37%.
These rates apply to PETROL and DIESEL vehicles that meet REAL DRIVING EMISSIONS 2 (RDE2) legislation.
If a DIESEL car does NOT meet RDE2 then 4% is added to the PERCENTAGE RATE.
The car benefit covers the provision of the car AND the running cost of the car but does NOT cover the provision of fuel that is used for PRIVATE USE by the employee.
If an employer provides fuel for PRIVATE USE, then a Fuel Benefit is assessable on the fuel provided.
The amount of the fuel benefit is also computed by using the PERCENTAGE RATE based on the type of vehicle used, as per the Company Car Benefit.
This PERCENTAGE RATE is then multiplied by a base figure of £24,500 to calculate the FUEL BENEFIT chargeable to income tax.
If the employee makes a contribution to the employer for the fuel then the fuel benefit is only eliminated if ALL of the fuel is paid for. There is no reduction in the fuel benefit for contributions TOWARDS the fuel costs. The employee must pay for ALL of the cost of the PRIVATE FUEL for the fuel benefit to be eliminated.
Where employees are provided with a company van, there is no taxable benefit where the vehicle is driven to and from work and PRIVATE USE is INSIGNIFICANT.
However, where PRIVATE USE is SIGNIFICANT then there is a tax charge of £3,490 per annum.
If fuel is provided for UNRESTRICTED private use, there is an additional charge of £666 per annum.
Where employers provide loans to employees at rates of interest below commercial rates, a taxable benefit may apply. The commercial rate is deemed to be 2.25% (official rate of interest) for tax year 2020/21.
If the loan to the employee is does not go above £10,000 at any time in the tax year then there is no taxable benefit.
If there is a taxable benefit the interest at the official rate of interest is calculated and any interest paid by the employee is deducted. This calculation can be done using the AVERAGE METHOD or the ACCURATE METHOD and either HMRC or the taxpayer can elect to use the ACCURATE method.
AVERAGE METHOD: calculates the loan outstanding at the beginning and end of the year. If the loan is taken out or repaid during the year then these dates are used instead.
ACCURATE METHOD: calculates the interest accurately based on the actual amounts outstanding on a day-by-day basis.
Tax Implications of Share Schemes
With share schemes provided by an employer it is important to know if the scheme fails to meet certain HMRC requirements and is UNAPPROVED by HMRC (therefore NON-TAX ADVANTAGED) or if the scheme does meet certain HMRC requirements and is APPROVED by HMRC (therefore TAX ADVANTAGED).
For share options, the following table sets out the tax implications for the Grant of Options, the Exercise of Options and the Disposal of Options, depending on whether they are part of a Non-Tax Advantaged or Tax Advantaged share scheme.
|NON TAX ADVANTAGED||TAX ADVANTAGED|
|GRANT||NO TAX||NO TAX|
|EXERCISE||INCOME TAX CHARGE based on MV on exercise – cost of shares / options. Class 1 NIC applicable if shares readily convertible to cash.||NO TAX (unless EMI scheme and issued below market value, then INCOME TAX CHARGE)|
|DISPOSAL||CAPITAL GAINS TAX. Gain calculated as MV on disposal – MV on Exercise||CAPITAL GAINS TAX. Gain calculated as MV on disposal – cost of shares / options.|
NOTE: MV = Market Value and EMI Scheme = Enterprise Management Incentive (EMI) Scheme.
NOTE: Where there is a charge to Income Tax, Class 1A NIC will be payable by the employer unless the shares are quoted (readily convertible to cash), in which case CLASS 1 employer and employee NICs will be payable.
Tax Advanced Share Option and Incentive Schemes
- SAVINGS-RELATED SHARE OPTION schemes (SAYE).
- COMPANY SHARE OPTION PLANS (CSOP).
- ENTERPRISE MANAGEMENT INCENTIVE scheme (EMI).
- SHARE INCENTIVE PLANS (SIP).
|PARTICIPATION||ALL EMPLOYEES||EMPLOYER CHOOSES||EMPLOYER CHOOSES|
|MAXIMUM VALUE||£500 / MONTH IS SAVED||OPTIONS ON £30,000 OF SHARE / EMP’EE||OPTIONS ON £250,000 OF SHARES / EMP/EE|
|EXERCISE PERIOD||3-5 YRS||3-10 YRS||UP TO 10 YRS|
|ISSUE PRICE||NOT <80% OF MV||MV||ISSUE AT MV TO AVOID INCOME TAX CHARGE|
|BASE COST OF SHARES (CGT)||PRICE PAID||PRICE PAID||PRICE PAID + DISCOUNT IF ANY AMOUNT CHARGED TO INCOME TAX|
|OTHER||CAN’T OWN >30% OF COMPANY OR EXCLUDED FROM SCHEME||BUSINESS ASSET DISPOSAL RELIEF (BADR) AVAILABLE: OWNERSHIP RUNS FROM GRANT DATE AND NO NEED TO OWN >5% OF SHARES|
Share Incentive Plan (SIP)
This is a tax advantaged scheme where the employer can GIVE free shares to the employee and the employee can buy further shares without any charge to INCOME TAX.
|MAXIMUM FREE SHARES / YR||£3,600 / YR|
|BUY PARTNERSHIP SHARES||MAX = LOWER OF £1,800 OR 10% SALARY|
|MATCHING SHARES||2 PER PARTNERSHIP SHARE|
|DIVIDENDS||TAX FREE IF INVESTED IN MORE SHARES|
|HOLDING PERIOD||5 YEARS FOR FULL BENEFIT|
|BASE COST OF SHARES||MARKET VALUE WHEN WITHDRAWN FROM SCHEME|
NOTE: If the shares are withdrawn from the plan and sold the same day then no CAPITAL GAINS TAX will apply as the base cost will be the current MARKET VALUE.
STATUTORY REDUNDANCY payments are EXEMPT from INCOME TAX.
EX GRATIA (which means ‘out of a sense of moral obligation’) payments are EXEMPT up to a maximum of £30,000. But this limit is reduced by the amount of STATUTORY REDUNDANCY payments received.
Any payment which is simply contractual is chargeable to INCOME TAX.