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 on Personal Taxation.
If the tax underpaid is up to £2,000 and the 2002/03 tax return is submitted by 30 September 2003, the underpayment
can be settled through PAYE for 2004/05 rather than being collected on 31 January 2004.
Class 1 NIC rates 2003/04
Employers and employees both contribute. Employee contributions used to be capped at the upper earnings limit, but a
new charge of 1% will now apply to all pay above the primary threshold.
|LEL: lower earnings limit
|PT: primary threshold
|UEL: upper earnings limit
No NIC are payable by employee or employer on earnings up to the PT.
Earnings between the LEL and the PT must be reported by the employer, and the employee receives credit towards the State
Pension, but no NIC are payable.
Rates of NIC on earnings above the PT depend on whether the employee is within the State Second Pension (S2P), or whether
the employer has 'contracted out' using a final salary (FS) or money purchase (MP) scheme.
|PT - UEL
Contracting-out employers receive a special rebate on earnings between the LEL and the PT.
A person with more than one employment can defer the payment of some employee NIC until after the end of the tax year,
when the total amount payable can be checked and limited so the full 11% rate is only applied to income between
the PT and the UEL.
Benefits in kind
Benefits in kind are usually valued at a 'cash equivalent' and are then charged to income tax on the employee and
Class 1A NIC (at 12.8%) 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.
|15% of list price
||170, 175 etc.
||160, 165 etc.
||150, 155 etc.
|max 35% benefit
For diesel cars add 3% (min. is 18%, max. still 35%). There is no discount for the level of business mileage
or the age of the car, but deduct employee contributions for private use.
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.
Up to 2002/03, the taxable amount varied according to engine size and type of fuel. For 2003/04, the percentage used to
calculate car benefit will be applied to a standard figure of £14,400.
Vans provided by the employer are charged at a flat rate of £500 (£350 if the van is
over four years old at the end of the tax year).
Loans of money of over £5,000 are charged on the excess of the official rate (5%) 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 in kind
Many benefits in kind are not charged to tax. A full list cannot be given here, but some of the principal ones are:
- providing a mobile phone, even with private use (but paying the bills on the employee's own phone remains chargeable)
- lending computer equipment where the 20% charge would be up to £500 (ie value up to £2,500)
- 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 miles
Exempt fuel-only allowances: company car
|1400cc or less
|1401cc - 2000cc
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 approved pension schemes
- payments of up to £5 a night when staying away for 'personal incidental expenses' (£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 is also charged
if the company is quoted, as the shares can be easily sold.
If the employer operates one of these 'Revenue-approved' share 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) 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 - small trading companies can grant options to buy up to £100,000
worth of shares to selected employees.
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 on exercising the options. The
CGT charge is likely to be smaller and later than the IT/NIC.