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Get To Know Your Pay!

Mark Harwood - 25/06/2011

Get To Know Your Pay!

Do you ever wonder…?

-          How your pay is calculated?

-          Why your “take home” pay is different to your gross salary?

-          Whether you are missing out on benefits from your practice job?

…If you do, read on!

The good news – some pay is tax free

As an employee, part of your salary will be tax free.  For most employees this will be the basic personal allowance, which is currently £7,475 per annum.  Employees will also generally not pay any National Insurance on the first £7,225 of their salary.

By tax free, this means free from income tax and National Insurance.

You may have noticed you have a tax code on your pay slip each month.  This tax code relates to your personal allowance, so for example a tax code of 747L would mean that you are entitled to £7,475 of salary tax free each year.  You are likely to have a different tax code if you have for example taxable benefits from your employer or if you have multiple sources of income.

In practice, your employer is likely to spread this tax free amount over the year evenly, so that you do not end up having pay fluctuations unnecessarily.  

So what do I pay tax on?

As an employee, you will pay tax on your salary in two ways:

  1. Income tax
  2. Employee’s National Insurance (a tax by nature but not name)

It is also worth mentioning that your employer will also pay employer’s National Insurance on your salary.

Above the personal allowance level, further salary, up to an additional £35,000 (£35,250 for National Insurance), is subject to income tax at 20% and National Insurance at 12%.

Any salary above this level is hit by income tax at 40% (you may also have heard of “super” earners with salaries of £150,000 of more who will pay income tax of 50% above this amount) and National Insurance at 2%.  Anyone earning over £100,000 begins to lose their personal allowance at the rate of £1 for every £2 over £100,000.

Let’s take a look at two examples – one with an employee earning £28,000 per annum and another earning £45,000 per annum.

Employee 1 – salary £28,000 per annum
 

Gross salary Income Tax   Gross Salary Employee National Insurance
First £7,475 £nil   First £7,225 £nil
Next £20,525 £4,105 (at 20%)   Next £20,775 £2,493 (at 12%)
Total £28,000 Total £4,105   Total £28,000 Total £2,493

Net salary = gross salary – income tax – employee national insurance = £21,402 per annum


Employee 2 – salary £45,000 per annum

 
Gross salary Income Tax   Gross Salary Employee National Insurance
 First £7,475  £nil    First £7,225  £nil
 Next £35,000  £7,000 (at 20%)    Next £35,250  £4,230 (at 12%)
 Next £2,525  £1,010 (at 40%)    Next £2,525 £51 (at 2%)
 Total £45,000  Total £8,010    Total £45,000  Total £4,281

Net salary = gross salary – income tax – employee national insurance = £32,709

How is this tax and National Insurance collected?

You are no doubt aware that your “take home” pay over the year is less than your annual gross salary.  If only it wasn’t!

The tax and National Insurance you pay on your salary is collected through the PAYE (Pay As You Earn) system whereby your employer will hold back the tax and National Insurance from your pay packet and pay it over to H M Revenue & Customs (HMRC) shortly after you have been paid.

What about student loans?

Student loan repayments are also deducted through the PAYE system.  Repayments start when an employee earns over £15,000 per annum and are deducted at a rate of 9 per cent for income in excess of this amount.

I also receive benefits as well as a salary – how are these dealt with?

Benefits or “perks” of the job as they are sometimes also known will either be subject to income tax or be tax free.

Many employers provide a range of perks to attract and incentivise the best people. It can be confusing trying to work out how much your “take home” pay will be, particularly if there are also a number of benefits.

The value of each benefit is added to an employee’s gross salary and the employee will pay tax on the total amount.  Taxable benefits are included on form P11D each year.  The value of the benefit is included in your tax code the following year so that the appropriate amount of tax can be deducted at source.

Benefits which are taxable are subject to income tax, but not employee’s National Insurance.  It is worth mentioning that on some benefits, your employer will also be required to pay employer’s National Insurance.

If you are reimbursed expenses which are incurred what is called “wholly, exclusively and necessarily” for the purposes of your employment, then your employer should provide you with a form/letter to make a claim to HMRC to ensure that you are not taxed on these.

There are many benefits or ‘perks’ that can be included in an employee’s package. The table below shows examples of those benefits that are likely to be taxable and those that are not. This article covers the main benefits and is not meant to be exhaustive. Please note that those benefits under the ‘tax-free’ heading may be subject to certain qualifying conditions and, therefore, in some situations, could themselves be taxable.

Taxable and Tax-free Benefits

Taxable Tax free
Private medical insurance Provision of work uniforms (these must be specifically for work e.g. a tunic bearing your work logo)
Company car Mobile phone (if the contract is in the name of the practice)
Provision of private fuel Accommodation (in certain circumstances – see below)
Loans of more than £5,000 Childcare vouchers (up to £55 per week for basic rate tax payers and £28 per week for higher rate taxpayers)
Gym membership Car parking at or near work
  Professional subscriptions 
  Loans of less than £5,000

Employer-provided Cars

Employer-provided cars are referred to as ‘company cars’.  Your employer may not trade as a company, but the provision of a car is still referred to as a ‘company car’.

Some businesses use what is known as a ‘pool’ car, which is defined as a vehicle that is available for use by anyone in the company, and must not be used for any private purposes. If an individual uses such a pool car, there is no benefit in kind.

The provision of a company car that is used for any non-business use – that is, if it can be taken home overnight, is treated as a benefit in kind.

The calculation is pro-rated where the car is unavailable for part of the year.

Let’s assume a car has a list price of £13,000 and CO2 emissions of 140 g/km and is available for a full tax year:

The benefit is calculated by multiplying the list price (plus options) (and not the purchase price even if second hand) by a percentage based on the CO2 emissions.  In this case:

£13,000 x 17% = £2,210 (benefit amount)

This benefit amount is subject to income tax.

Provision of Private Fuel on Company Cars

Some employers may pay for an individual’s fuel costs for a company car. This is also considered a benefit in kind. 

This is calculated by multiplying £18,800 (whatever the list price) by a percentage based on the CO2 emissions.  So using the above example:

£18,800 x 17% = £3,196 (additional benefit for private fuel)

This benefit amount is subject to income tax.

Mileage Allowance

If you use your own car for business mileage, then you are entitled to the following rates of reimbursement for the business miles that you cover on a tax free basis:

First 10,000 miles: 45p per mile (increased from 40p per mile on 6 April 2011)

Over 10,000 miles: 25p per mile thereafter

It is important to note that business mileage does not include home to work and work to home travel.

A practice employer is under no obligation to pay these HMRC approved tax free rates.  If you receive more than these rates, then the excess will be taxed as a benefit in kind.  If you receive less than these rates, then you can make a claim to HMRC for an income tax reclaim on the difference. 

Accommodation

In some circumstances, an employer may provide accommodation to an employee as part of their remuneration package. This can be very attractive to first time employees, particularly new graduates who may be relocating, saving them the usual headaches of finding their own accommodation. While there are often savings to be gained, it is important to consider whether this perk will be treated as a benefit in kind and therefore be subject to tax.

There are two criteria that need to be met to ensure no taxable benefit arises for a vet. The first – referred to as the ‘customary’ test – has already been established by the BVA and determines whether it is customary for accommodation to be provided for that employment role. The second criteria – referred to as the ‘better performance’ test – is rather more complicated, but is usually met when a vet living in practice accommodation is regularly required to be on call.

Allowances and Bonuses

Care should be taken when considering whether an apparent benefit is in fact a true benefit or instead simply additional salary.  For example, a “round sum” allowance of £100 received once a month, provided by your employer to cover say personal telephone costs, should be processed through the payroll as additional salary and be subject to both income tax and National Insurance in the normal way (i.e. through the payroll), as HMRC would argue that it could be used by an employee to cover any personal expenditure.

Similarly, bonuses are additional income and are taxed through the payroll in the usual way in the month of receipt.

Pension Contributions

It is never too early to start thinking about pension provisions.  Any contributions made by the employer are a tax-efficient way to be remunerated for you, because as an employee you will not incur any income tax or National Insurance costs on the additional remuneration.

If you also contribute personally to a pension your pension provider claims back basic rate tax at 20% directly from the government.  So for a payment by you of say £800 you would get £1,000 in your pension pot.  Higher rate tax payers can also claim a further 20% tax relief through their tax return.

Summary

Not all of your remuneration – both salary and in some cases benefits, are subject to tax.  Hurray!

The rules regarding benefits and tax are fairly complex and different benefits are taxed in different ways.  It is worthwhile understanding how your pay and any benefits that you may receive are treated for tax purposes, so you can be sure that you are getting the best deal possible from your employer.

This article was kindly provided by Hazlewoods:

Hazlewoods 

 

Mark Harwood is a senior manager in Hazlewoods accountants and specialises in advising the veterinary profession, offering wide-ranging advice to his clients, who are all vets. He is a regular lecturer to the profession on relevant business and tax related topics.

Mark welcomes questions from readers and can be contacted on 01242 680000 or mark.harwood@hazlewoods.co.uk

 

This release has been prepared as a guide to topics of current financial business interests. We strongly recommend you take professional advice before making decisions on matters discussed here. No responsibility for any loss to any person acting as a result of this material can be accepted by us.


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