Employment Options

• Cheap or interest free loans
• Your remuneration package
• Expense payments
• Travel and subsidence
• Pensions
• Performance related pay
• Company cars
• Fuel for private mileage
• Company vans

Is your PAYE code correct?

Many people can go for years paying too much (or, perhaps more worryingly, too little) tax. PAYE aims to collect, over the course of a tax year, approximately the right amount of tax from your earnings. This is done by the issue of one, or sometimes a series of tax codes, which are used by your employer to calculate the tax to be deducted from your earnings.

Many employees have incorrect tax codes. In particular, they may not have notified the tax office of changes in their circumstances that would affect their tax position, such as changing jobs and / or losing the benefit of a company car, or they may have started investing in a pension.

It is important that we check your PAYE code now, because it is much easier to rectify mistakes before the tax year ends. As a first step, though, look at your salary slip and see what code is currently being applied. The letter at the end of the code tells us whether your code includes one of the standard allowances, and you can see if this is right for your circumstances:

• L includes standard personal allowance
• P includes the full higher rate personal allowance for age 65 – 74, assumes income less than £21,801
• V as P, but also includes the full married couple’s allowance for age 74, at least one spouse born before 6 April 1935
• Y includes the full personal allowance for age 75+, assumes income less than £21,801
• T there is usually an adjustment in your code which requires manual checking by HM Revenue & Customs each year

Or you may have the letter K at the beginning of your code. This is a special tax code and means that you are paying tax on more than just your salary through PAYE. It may be that the tax due on your state pension might be collected through increasing the tax you would otherwise pay on your company pension, or you may be receiving some rental income which is being taxed through your salary rather then you paying tax at the end of the year. If you owe back tax, this can also be collected by an adjustment to your tax code. A K code applies when the adjustments made reduce your allowances to less than zero - in effect, it means that you have a 'negative' tax allowance. The maximum tax which can be deducted using a K code is 50% of your income in each month.

Use our Payslip Calculator to check your payslip.

Cheap or interest-free loans

Where loans from an employer total more than £5,000 at any time in the year, tax is chargeable on the difference between any interest actually paid and interest calculated at the 'official' rate, which is currently 6.25% per annum.

Your remuneration package

An attractive remuneration package can include any of the following:

• salary
• reimbursement of expenses
• more generous expenses - business travel in first or business class, or a better quality hotel on business trips
• bonus or profit related award schemes
• share incentive arrangements
• pension provision
• childcare
• life assurance and/or healthcare
• choice of a company car or additional salary and reimbursement of car expenses for business travel in your own car
• mobile phone
• Contributions to the additional costs of working at home
• other benefits in kind including, for example, an annual function costing not more than £150 per head, or long service awards

Of course, negotiating the appropriate package is a matter for you and your employer, but you should seek our advice to ensure that your overall package is as tax and NI efficient as possible.

Expense payments

Your employer is required to report expenses payments to HM Revenue & Customs on form P11D each year. To avoid paying tax on these payments you have to claim a deduction on your Tax Return - your employer will provide you with a copy of your 2007/08 P11D no later than 6 July 2008.

This cumbersome process of reporting and then claiming expenses paid may be avoided if your employer has been granted a dispensation. Expense payments covered by the dispensation do not have to be reported to HM Revenue & Customs and they do not have to be included, with a counter-claim, on your own Tax Return. Payments covered by dispensations will be subject to review from time to time, including in the course of an HM Revenue & Customs inspections visit.

You may be able to claim tax relief for other expenses you incur in connection with your job, but the rules are very restrictive, and you may not always be able to claim for expenses you regard as reasonable work related expenditure.

Travel and subsistence

The rules which allow tax relief for travelling and subsistence expenses are quite complex, and subtle differences in your working arrangements can change the amounts which you are able to claim, or can be paid tax free. You will not normally be able to claim for the cost of travelling to your normal place of work, but if you have more than one place of work, sometimes travelling expenses are tax deductible when travelling to a temporary place of work.

Site-based employees are able to claim a deduction for travel to and from the site at which they are working, plus subsistence costs when they stay at or near the site.

Because the impact of tax on your travelling expenses can be quite significant, you should ask for help if you are considering a change involving a long commute to work.

Pensions

Employer contributions to your pension scheme or your own personal pension policies are not liable for tax or NICs. You should be aware that while your employer can contribute to your personal pension scheme, these contributions are added to your own for the purpose of measuring your year's pension input against the annual allowance of £235,000 for 2008/09 (£245,000 in the next tax year).

Performance related pay

Although there are no tax breaks, performance related pay and bonus schemes are incentives to many to work harder and enjoy some of the benefits of the employer's increase in profits. There can, on the other hand, be an NI saving for employees (not directors) if performance related pay is not included in the weekly or monthly pay, but instead paid as a one off bonus.

Company cars

The company car continues to be an important part of the remuneration package for many employees despite the increases in the taxable benefit rates over the last few years.

Employees and directors pay tax on the provision of the car and on the provision of fuel by employers for private mileage. Employers also pay Class 1A NICs at 12.8% on the same amount. This NIC charge is payable by the 19 July following the end of the tax year.

The amount on which tax and Class 1A NICs is paid in respect of a company car depends on a number of factors. Essentially, the amount charged is calculated by multiplying the list price of the car, including most accessories, by a percentage. The percentage is set by reference to the rate at which the car emits carbon dioxide, according to officially determined rates.

2008/09 taxable benefits table

CO2 in g/km*	Taxable %		CO2 in g/km*	Taxable %
	Petrol	Diesel		Petrol	Diesel
Less than 121	10%	13%	185 to 189	25%	28%
121 to 139	15%	18%	190 to 194	26%	29%
140 to 144	16%	19%	195 to 199	27%	30%
145 to 149	17%	20%	200 to 204	28%	31%
150 to 154	18%	21%	205 to 209	29%	32%
155 to 159	19%	22%	210 to 214	30%	33%
160 to 164	20%	23%	215 to 219	31%	34%
165 to 169	21%	24%	220 to 224	32%	35%
170 to 174	22%	25%	225 to 229	33%	35%
175 to 179	23%	26%	230 to 234	34%	35%
180 to 184	24%	27%	235 and over	35%	35%
* The exact CO2 figure is rounded down to the nearest 5g/km

Discounts apply for 'greener' cars running on alternative fuels. Ask us for details when you consider your options.

2009 and beyond

With effect from 6 April 2010, the 15% rate for petrol cars and the 18% rate for diesel cars will apply to cars with emissions of less than 130 g/km. The rates above will apply through the tax year 2009/10.

There is a discount that applies to Euro IV compliant diesel cars first registered up to 31 December 2005, which reduces the above figures by 3%.

Fuel for private mileage

If your employer provides fuel for any private travel, there is a taxable benefit, calculated by multiplying £16,900 by the percentage used to calculate the benefit on the car, as described above.

You can avoid the car fuel charge by either paying for all fuel yourself and, claiming the cost of fuel for business journeys or by reimbursing your employer for fuel used privately . You will not be taxed if your employer pays you the HM Revenue & Customs advisory rates which are:

From 1 June 2008

Baseline fuel mileage rates
	Rates per mile
Engine Capacity	Petrol	Diesel	Gas
Up to 1400cc	12p	13p	7p
1401 - 2000cc	15p	13p	9p
Over 2000cc	21p	17p	13p

1 January 2008 to 31 May 2008

Baseline fuel mileage rates
	Rates per mile
Engine Capacity	Petrol	Diesel	Gas
Up to 1400cc	11p	11p	7p
1401 - 2000cc	13p	11p	8p
Over 2000cc	19p	14p	11p

HM Revenue & Customs have announced that rates will now be reviewed biannually and any changes will take effect on 1 January and 1 July. This area of our site will be updated around the beginning of June and December about one month before any change takes effect.

If you or your employer wish to use different rates, you will need to have them approved by the tax authority, otherwise you may incur a tax liability.

Company cars are expensive for both employers, who have to fund the purchase or finance costs, insurance, maintenance and NIC costs, and for employees, who have to pay tax on the car benefit and perhaps also the fuel benefit. Although it is by no means certain in all cases, we have found that many employees and employers are better off financially if the employer stops providing company cars and instead pays the employees for business mileage in their own cars at HM Revenue & Customs rates. However, there is no option for you to use alternative rates without incurring tax.

Payments for business travel, made at the following rates will not attract a charge to tax or NICs:

Vehicle	First 10,000 miles	Thereafter
Car / van	40p	25p
Motorcycle	24p	24p
Bicycle	20p	20p

Case study

Helen's company is successful and she pays tax at 40%. She runs a petrol driven company car costing £18,000, with emissions of 182g/km.

Her 2008/09 tax bill on the car is therefore: £18,000 x 24% x 40% = £1,728.00

Helen's company will pay Class 1A NICs of: £18,000 x 24% x 12.8% = £552.96

The company also pays for all of Helen's petrol. Because Helen does not reimburse the cost of fuel for private journeys, she will pay tax of: £16,900 x 24% x 40% = £1,622.40

and the company will pay Class 1A NICs of: £16,900 x 24% x 12.8% = £519.17

The total tax and NI costs are therefore over £4,420. Furthermore, although the company is paying for the fuel, the company will also need to pay a gross amount of over £5,584 to provide Helen with the funds to pay the tax. When employers' national insurance is taken into account, the gross cost of funding the full tax and the national insurance liabilities will be over £7,370.

Two rules of thumb

Q: Am I better off giving up the company car and instead claiming mileage allowance for the business travel I do in a car that I buy myself?

The rule of thumb answer is that you are more likely to be better off if your annual business mileage is modest and you run an inexpensive car.

Q: Am I better off having my employer provide me with fuel for private journeys, free of charge, and paying tax on the benefit, or bearing the cost myself?

The rule of thumb answer is that you are more likely to be better off taking the free fuel if your annual private mileage is high.

Every case needs to be looked at on its own merits, and considered from the point of view of both the employee and the employer. And cost is not the only factor. As an employee, it might cost you more to have a company car, but you do not have to worry about bills or the cost of replacing it. As an employer running company cars, it might be more expensive, but you retain control over what may, for your business, be key operating assets.

Use our calculator to check the cost of your car or van benefit.

Pool cars

The HM Revenue & Customs definition of a pool car is very strict, but if a car qualifies, there is no tax or NIC liability. If you are not provided with exclusive use of a car, are generally only allowed to use it for business journeys and are not permitted to take a car home at night, you may be able to claim that you are using a pool car.

Company vans

There is a standard taxable benefit of £3,000 plus a further £500 of taxable benefit on company vans if fuel is provided by the employer. The benefit will apply unless only insignificant private use is made of the van, but home to work travel is regarded as business use for this purpose. However, the van must be provided for business use. If there is no conceivable business use, the van will be taxable. The maximum tax payable on the use of a company van is therefore £1,400, and the employer's Class 1A NIC payable is £448.

Many people have seen significant savings for both employer and employee in replacing company cars with employee-owned cars part-funded by mileage allowances at HM Revenue & Customs rates. However where a company vehicle is still appropriate, a 'van' rather than a car is worth considering. Why the inverted commas? You might be pleasantly surprised by some of the vehicles that qualify as 'vans'.