What are the tax regulations on the income from employment by working at a establish company in UK?

04 Jan

Most of the people are employees and gets salaries or wages. They may also acquire other benefits from their respective employers and make payment of the expenses which have a connection with their employment. This blog comprises of the working out of basic employment income on which a payment of the tax should be made. Also, the rules of personal service companies are considered where the taxpayer is to acquire employment income even if he/she has routed his/her services with the help of a establish company in UK. The income from employment and relevant taxes will be discussed in the blog in detail.

Income Acquired from Employment

Outline of Charge

The income from employment involves income that comes from an employment under a contract of service and also the income from office holders such as those of directors. The term ‘employee’ is used in the blog to refer to a person who acquires the income from employment (consisting of both the directors and the employees).

There are two types of income from employment namely general earnings and specific income from employment.

The general earnings are the earnings of an employee plus the cash equivalent of any non-monetary benefits liable to tax.

By earnings, it is meant that any salary, fee or wage, any gratuity or other profit or incidental benefit as acquired from the company by the employee if it is in the form of money or worth the cost of money (anything with direct monetary value or one that can be converted into direct monetary value) or something else that consists of an emolument of the employment.

The payments on the termination of the employment and income related to shares is included in the specific employment income. The domicile status and the residence of an employee makes the determination that whether the earnings are liable to tax or not. In case if an employee resides in the UK and has a UK-based domicile, then the earnings liable to tax from an employment in a year of tax are the general earnings acquired in that year of tax.

When can the earnings be acquired?

The taxation of the general earnings is done in the year of receipt. Generally, the money earnings are acquired on the earlier of the time at which the payment is made and the time entitlement to the payment occurs. Generally, the acquisition of non-money earnings is done when provided.   

The treatment of the general earnings consisting of money is done as acquired at the earlier of:

  • The time when the payment is done.
  • The time when a person gets the entitlement of the payment of the earnings.

In case if the employee is a director of the company, then the acquisition of earnings from the company is done on the earliest of:

  • The earlier of the two alternatives as mentioned in the general rule.
  • The end of the period of account of the UK company incorporation (if by then, the amount was determined).
  • The time when the amount is credited in the records of accounts of the company.
  • The time at which the determination of the amount is done (if after the end of the period of account of the company).

The treatment of the benefits liable to tax is generally done as acquired when they are provided to the employee.

The basis of the receipt is not applicable to pension income or social security benefits liable to tax. The taxation of these sources of income is done on the amount accruing in the year of tax, whether or not it is acquired in that year.

Net Earnings Liable to Tax

The total earnings liable to tax minus total allowable deductions are the net earnings of a year of tax which are liable to tax. Usually, these subtractions cannot give rise to a loss, they can only result in the reduction of the net earnings liable to tax to nil.

Person Subject to Tax on the Employment Income

Generally, the person liable to tax on the income from employment is the person whose employment has a relation with the related earnings. However, if the tax is related to general earnings acquired after the death of the person to whose employment the earnings are related, the personal representatives of the person are liable for the tax. The tax is a liability of the estate.

Employment and Self Employment

The employment includes a contract of service while the self-employment includes a contract for services.

The difference between employment (receipts liable to tax as earnings) and self-employment (receipts liable to tax as the income from trade) is a fine one. Employment includes a contract of service, while the self-employment includes a contract for services. The taxpayers tend to prefer self-employment, due to the fact that the rules on subtractions for expenses are considered to be more generous. The status of a worker also has an effect on the national insurance: generally, the self-employed make a payment less than the employees.

Factors that Indicate Employment

The following factors are involved:

  • The degree of control which is exercised by the person who does the work (employment is indicated by a high level of control).
  • Whether the person who has made the offer of the work should provide further work (if yes, then employment is indicated).
  • Whether the worker should accept further work if an offer is made (if yes, an employment is indicated).
  • Whether the worker has an entitlement of the benefits of employment such as holiday pay, sick pay and facilities of pension (employment is indicated by entitlement).
  • Whether the worker works for just one organization or person (employment is indicated by such work).

Factors that Indicate Self-Employment

The factors include:

  • Whether the worker gives his/her own equipment (if yes, then a self-employment is indicated).
  • What degree of financial risk is taken by the worker (if the risk is high, self-employment is indicated).
  • Whether the worker can benefit from sound management (if he/she can, then self-employment is indicated).
  • Whether the worker works for a number of different organizations or persons (self-employment is indicated by such working).
  • Whether the worker has hired workers of his/her own (if yes, then a self-employment is indicated).
  • What is the degree of responsibility of the worker related to responsibility for management and investment (self-employment is indicated if most of the responsibility belongs to the worker).
  • Whether the worker can work when he/she makes a choice (self-employment is indicated if he/she can do so).

Agreement’s Wording

The consideration of the wording utilized in any agreement between the person who performs the work and the worker should be taken. Such as, if the description of the contract is given as a contract for services, this would give a suggestion that the worker is self-employed. However, such wording does not conclude anything about the original legal relationship and other factors may prove that in fact, the contract is a contract of service.

Cases Related to distinction between employment and self-employment

  • Edwards Case: A person, civil engineer by profession, occasionally acted as an inspector on temporary ad hoc appointments. It was held that there was not any ongoing office that could be vacated by a single person and held by some other person so the acquired fees were form self-employment and not employment.
  • Hall Case: A short term series of contracts kept a vision mixer engaged. It was held that the vision mixer was self-employed, not because of a particular detail of the case but because the overall picture represented self-employment.
  • Carmichael case: The individuals engaged as the visitor guides on a casual basis of “as required” could not be termed as employees. An exchange of correspondence between the employees and the company was not a contract of employment since there was no provision in relation to the frequency of work and a flexibility was present in order to accept work or turn down the offer as it occurred. Arrangements in the case of sickness, pension and holiday were not applicable and nor were the procedures of grievance and discipline.

Benefits Liable to Tax

The taxation of most of the employees working in a UK company incorporation is done according to the benefits code. A part of the provisions of the code is only applicable to the exempt or excluded employees (non-directors/lower paid).

The taxation of benefits is covered in the income tax earnings and pensions act 2003 (ITEPA 2003) providing a comprehensive legislation. Generally, the legislation is applicable to all the employees. However, only some specific parts of it are applicable to the excluded employees.

An excluded employee is defined as an employee in lower paid employment who either is not the director of the limited company formation UK or is a director without any material interest in the company (here material is defined as the control of more than 5% of the ordinary capital of shares) and either he/she is a director who works full time or that limited company formation UK is not making any profit or has held its establishment for the purposes of charity only.

The term director is described as any person who is acting as a director or any person who is in accordance with the instructions that the directors are supposed to act, excluding the professional advisor.

The lower paid employment is defined as the one where the earnings for the year of tax are not more than an amount of £8500. In order to decide whether this is applicable, the total earnings and the benefits should be summed up together, which would be liable to tax in the case if the employee was not an excluded employee.

The consideration of a number of specific subtractions should be done in order to determine the lower paid employment. These include the contributions to the registered schemes of pension and payroll giving. However, there is no consideration for the general subtractions from the employment income. In case where a car is provided but the employee could have made the choice of a substitute cash, then the higher of the car alternative and the benefit of car should be brought under usage while calculating the earnings in order to determine that the employee is an excluded employee or not.

The employees (directors inclusive), who are not the excluded employees may be known as the ‘P11D Employees’. The P11D is the form that is supposed to be completed by the employer for each such employee with the details of benefits and the expenses.

General Expenses of the Business

In case if the employer who has register a business name UK reimburses the expenses of business on the items such as travel or hotel stays, then the reimbursement amount is the benefit liable to tax for the employees other than the excluded employees. To avoid the taxation on this amount, an employee should then claim to subtract it as an expense. However, practically, many such payments of the expenses are not reported to the HMRC and can be overlooked due to the fact that it has been agreed in advance that a claim for their deduction would be possible (i.e. P11D dispensation).

In case when an individual has to spend one or more nights away from his/her home, the reimbursement of expenses may be done on them by their employers. Such reimbursement is on the expenses on the items incidental to their absence (such as meals and private phone calls).

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