Tax and the Employee

Employees’ income tax is collected by the Revenue under the Pay As You Earn (PAYE) system. Each employee is given a tax code number and the employer deducts tax from your earnings by reference to that number.

Many code numbers are incorrect and you should always check your number and contact the Revenue if you are unsure. Code numbers reflect many items, including tax you may owe on benefits in kind.

Common benefits include travel and subsistence costs, cars and cheap or interest-free loans.

If your employer reimburses you for expenses you incurred whilst out on business, you would have thought that there could be no tax bill. However, this is not always the case and you should check the system used by your employer. Otherwise, you could end up paying too much tax.

At the end of each tax year, your employer has to send a summary of all of your benefits to the Revenue on form P11D. This will include all payments made to you to cover expenses such as mileage, subsistence and hotel bills. You, as an individual, can then write to the Revenue and claim tax relief on expenses you originally paid out of your own pocket wholly for business purposes. Of course, the answer may be that nothing is taxable and so employers can ask to be excluded from this process if they write to the Revenue. This is known as a dispensation.

Many employers pay a standard rate of mileage to all employees who use their own cars for business. The maximum rates that can be paid tax-free are set out in the legislation and since 6 April 2002 have been as follows:

Up to 10,000 miles - 40p
Over 10,000 miles - 25p

If you are paid for business miles at less than the authorised rate, you can write to the Revenue and ask for tax relief on the difference.

Furthermore, the employer is able to pay an additional 5p per mile tax-free to the employee if they take a fellow employee on a business journey as a passenger.

Company cars are taxed by reference to the list price and the carbon dioxide (CO2) emissions measured in grams per kilometre. Low emission cars (up to 155 gm/km in 2003/04) are charged at 15% of the list price building up to a maximum of 35% for high emission cars (255 gm/km and above in 2003/04).

Most diesel cars suffer a 3% supplement although the maximum charge cannot exceed 35%. Discounts apply to certain environmentally friendly cars. For cars registered before 1 January 1998, the charge is based on engine size.

CO2 emissions are recorded on the Vehicle Registration Document (V5).

A separate charge applies where private fuel is provided, unless the employee reimburses the employer for all private mileage (including travel between home and work).

The charge used to be determined by reference to engine size and the type of fuel provided. However, with effect from 6 April 2003, the charge is calculated by applying the percentage figure used to calculate the company car benefit to a fixed figure which for 2003/04 is set at £14,400.

The provision of private medical insurance is a taxable benefit.

An annual benefit is generally taxable where employees have the private use of company assets. The annual benefit amounts to 20% of the asset’s market value when first made available to any employee.

Private home telephone bills, including rental charges, which are paid for by the employer will be taxed as a benefit. There is no charge for private calls using a company mobile phone.

If loans made by the employer exceed £5,000 in a tax year, tax is chargeable on the difference between the interest paid and the interest due at the official rate. This situation often occurs with directors who overdraw their loan or current account and special attention should be paid to this issue, as the Revenue often check up on it.

In general employees’ national insurance (NI) is not due on benefits in kind except vouchers, stocks and shares, the discharge of an employee’s personal liability and benefits provided by way of ‘readily convertible’ assets.

Most benefits in kind however are subject to Class 1A (an employer’s NI contribution). As this currently amounts to 12.8% of the taxable value of the benefit, you may need to reconsider the tax efficiency of providing benefits.