COURSE: ACCA – TAXATION (TX)

Lecture Topic: Income Tax – Employment Income

1. Employment Income

The Employment Income figure to be included in the income tax computation is normally calculated as follows:

£
Cash/ Money Earnings (note 1) XX
Add: Taxable Benefits XX
Total Earnings from Employment XX
Less: Allowable Deductions (note 2) (X)
Employment Income XX

Note 1:

Cash/ Money Earnings include salaries, wages, bonuses, fees, tips, gratuities, commissions, etc.

Note 2: Allowable Deductions

Employees are allowed to claim certain specific expenditure as allowable deductions against their employment income. The
main allowable deductions are:

(i) Contributions to registered occupational pension schemes.

(ii) Subscriptions to professional bodies on the list of bodies issued by the Revenue, if relevant to the duties of employment.

(iii) Payments to charity made under the payroll deduction scheme (GAYE) operated by an employer.

(iv) Statutory mileage allowance (see taxable benefits).

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2. Taxable Benefits

The general rule in valuing benefits is:

The taxable value of a benefit is the marginal cost to the employer of providing the benefit to the employee, less any amount
made good (paid) by the employee.

However, for the more important benefits there are specific valuation rules, and these are covered hereunder.

2.1 Accommodation

Where an employee is provided with living accommodation as a result of his employment, the following applies:

(a) If the property is rented rather than owned by the employer, then the taxable benefit is the higher of (i) the rent actually
paid by the employer and (ii) the annual value of the property.

(b) If the property is owned by the employer (and cost £75,000 or less), then the taxable benefit is the annual value (also
called the rateable value).

(c) If the property was bought by the employer for a cost of more than £75,000, the taxable benefit is the annual value plus
an additional benefit. The additional benefit is calculated as:

(Cost of providing the accommodation – £75,000) × Official rate of interest

The cost of providing the accommodation is the purchase price of the property plus expenditure on improvements incurred
before the start of the tax year.

The official rate of interest is 2%. (This is given in the exam)

(d) Where the employer acquired the accommodation more than six years before first providing it to the employee, the
market value when first so provided plus the cost of subsequent improvements is used as the ‘cost of providing the
accommodation’ when computing the additional benefit. However, unless the actual cost plus improvements up to the start
of the tax year in question exceeds £75,000, the additional charge cannot be imposed, however high the market value.

Notes:

1. Benefits are time apportioned if provided for only part of the year. (This applies to all benefits).

2. The value of the benefit is reduced by any rent (contribution) paid by the employee for the accommodation. (This
applies to all benefits).

3. If the accommodation is job-related (i.e., the employee is required to live in the property in order to perform his duty),
then there is no taxable benefit.

2.2 Expenses connected with living accommodation

 In addition to the living accommodation benefit itself, expenses connected with living accommodation (e.g. heating,
lighting, cleaning, repairs, maintenance, etc.) are also taxable benefits where the cost is met by the employer.

The value of the benefit is the cost of providing it to the employee.

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2.3 Cars

Where an employer provides a car for an employee’s private use (which includes home to work travel), the value of the taxable
benefit is computed as follows:

Car Benefit = The car’s list price × percentage

(a) The list price is normally the retail price of the car plus the cost of optional accessories fitted to the car.

o Capital contributions are payments made by the employee in respect of the purchase price of the car or accessories.

Capital contributions made by the employee are deducted from the list price.

The maximum capital contribution that can be deducted in determining the list price is £5,000.

o The list price is not adjusted for any bulk discounts the employer may have received when purchasing the car. If there
is no list price, its ‘notional price’ (market value when new) is used.

(b) The percentage to be used is determined as follows:

o The percentage for electric-powered cars with zero CO2 emissions is 2%.

o For hybrid-electric cars with CO2 emissions between 1 and 50 g/km, the percentage is based on the electric range, as
follows:

Electric Range

130 miles or more 2%

70 to 129 miles 5%

40 to 69 miles 8%

30 to 39 miles 12%

Less than 30 miles 14%

o For a petrol car with a CO2 emission rate between 51 and 54 g/km the percentage is 15%.

For a petrol car with a CO2 emission rate of 55 g/km the percentage is 16%.

For petrol cars with CO2 emissions in excess of 55 g/km, the base percentage of 16% rises in 1% steps for every
additional full 5 g/km above the base level of 55 g/km up to a maximum of 37%.

For diesel cars that do not meet the RDE2 standard, a further 4% is added to the % as computed for petrol cars (up
to the maximum 37%). Diesel cars that meet the RDE2 standard are treated the same as petrol cars.

Notes:
1. The car benefit is reduced on a time basis where a car is first made available or ceases to be made available during the
tax year or is incapable of being used for a continuous period of not less than 30 days.

2. There is no additional benefit when the employer pays for insurance, road fund, licence, maintenance, etc. However,
the cost of providing a driver is a taxable benefit.

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 3. Pool cars are exempt. A pool car is one that is used by more than one employee; is not normally kept overnight; and
any private use is merely incidental to business use.
2.4 Car Fuel

 If fuel is provided for private use, there is a car fuel benefit.

 This benefit is calculated by multiplying the same percentage used for the car benefit by £25,300.

 This benefit is also reduced proportionately where the car is unavailable for part of the tax year.

 Note that unlike other benefits, no reduction is made in the fuel benefit for payments made by the employee unless he
pays for all fuel used for private purposes. If the employee does pay the full cost of the fuel used for private purposes,
then the car fuel benefit is reduced to nil.

2.5 Vans and heavier commercial vehicles

 If a van (of laden weight up to 3,500 kg) is made available for an employee’s private use, the benefit is £3,600 per
annum. The charge covers ancillary benefits such as insurance and servicing.

 Vans producing zero CO2 emissions (zero-emission vans) have a zero benefit charge.

 If the employee uses the van for home to work travel but is not allowed any other private use, then there is no taxable
benefit.

 Where fuel is provided for a van for private use, there is an annual van fuel benefit of £688.

 If a commercial vehicle of laden weight over 3,500 kg is made available for an employee’s private use, but the
employee’s use of the vehicle is not wholly or mainly private, then no taxable benefit arises.

2.6 Use of other assets (besides cars, vans and accommodation)

 Except for cars, vans and accommodation, the general rule here is that if an asset is loaned to an employee, while it is
still owned by the employer, then the taxable benefit is 20% of the asset’s market value at the time it is first
provided.

 Where the employer does not own the asset, but rents it, the value of the benefit is the higher of:
(a) The rental paid by the employer, and
(b) 20% of the market value

 Payments made by the employee for the use of the asset reduce the taxable benefit. (This applies to all benefits).

2.7 Assets given or sold to employees

 If an asset that was previously loaned to an employee is subsequently given or sold to him, the taxable benefit is the
higher of:

(a) The asset’s current market value, and

(b) The asset’s market value when first provided for the employee’s use minus any benefits already taxed (for the use
of the asset).

 Exception: Where an employee is given a bicycle which he has previously had the use of, the taxable benefit is the
current market value minus the price paid by the employee.

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2.8 Statutory (approved) mileage allowance

 Employees who use their own vehicles for business journeys will normally be paid a mileage allowance by their
employer.

 If the mileage allowance paid by the employer is more than the approved rates, the excess is treated as a taxable
benefit.

 If the employer pays less than the approved rates, the deficit is treated as an allowable deduction from
employment income.

 HMRC’s approved mileage rates for 2022-23 are as follows:

Form of transport First 10,000 miles Excess over 10,000 miles

Cars and vans 45p per mile 25p per mile
Motorcycles 24p per mile 24p per mile
Bicycles 20p per mile 20p per mile

2.9 Beneficial loans

 Beneficial loans are those made by the employer to an employee below the official rate of interest (2%).

The benefit is the interest at the official rate minus the interest payable by the employee.

There are two alternative methods of calculating the ‘interest at the official rate’:

(i) The average method.

The ‘average’ method averages the loan balances at the beginning and end of the tax year (or the dates on
which the loan was made and discharged if it was not in existence throughout the tax year), and computes the
‘interest at the official rate’ on this average.

(ii) The strict (accurate) method

Under the strict method, the ‘interest at the official rate’ is computed on the actual amount outstanding on a
daily basis. (For exam purposes, it is acceptable to work on a monthly basis).

The ‘interest payable by the employee’ is computed on the actual amount outstanding on a monthly basis.

 The following rules regarding loans should also be noted:

 If all or part of a loan to an employee is written off, the amount written off is treated as a benefit and charged to
tax.

 No taxable benefit arises if the total of all loans made to the employee did not exceed £10,000 at any time in the
tax year.

 Where loans are made to employees on commercial terms by employers who lend to the general public, then no
taxable benefit arises.

 No taxable benefit arises if the loan is a qualifying loan (i.e. a loan on which the interest qualifies as a business
expense or as deductible interest).

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3. Exempt benefits
Certain benefits provided to an employee are exempt from tax. Some of these benefits are wholly exempt, some are partially
exempt, and some are only exempt if certain conditions are met.

(a) Entertainment provided to employees by genuine third parties is exempt.

(b) Workplace nursery (childcare) provided by the employer is exempt.

(c) Sporting or recreational facilities provided by the employer are exempt.

(d) Assets or services used in performing the duties of employment provided any private use of the item concerned is
insignificant.

(e) Welfare counseling and similar minor benefits are exempt.

(f) Bicycles or cycling safety equipment provided to enable employees to get to or from work are exempt.

(g) Workplace parking is exempt.

(h) Work related training costs are exempt.

(i) Air miles or car fuel coupons obtained as a result of business expenditure but used for private purposes.

(j) The private use of one mobile phone, and top up vouchers for that phone are exempt.

(k) Employer provided uniforms are exempt.

(l) Employer contributions to the employee’s pension plan(s) are exempt.

(m) Trivial benefits (except cash and cash vouchers) which do not cost more than £50 per employee are exempt.

(n) Private medical insurance premiums paid to cover treatment when the employee is outside the UK in the performance of
his duties are exempt.

(o) Awards under most staff suggestion schemes are exempt. However, if an award exceeds £5,000 the excess over £5,000 is
taxable.

(p) The first £8,000 of removal (relocation expenses) is exempt.

(q) Where the employee has to work from home, the employer can pay a tax-free allowance of £6 per week to cover extra
light and heat costs.

(r) Up to £15,480 a year paid to an employee who is on a full-time course lasting at least a year. If the £15,480 limit is
exceeded, the full amount is taxable.

(s) Gifts of goods from third parties are exempt if the value is £250 or less. If this limit is exceeded, the full amount is taxable.

(t) Non-cash awards for long-service are exempt, provided the cost is not more than £50 per year of service.

(u) Private incidental expenses paid to an employee who has to spend one or more nights away from home on business trips
are exempt if the amount is no more than £5 for each night spent wholly in the UK and £10 for each night spent outside the
UK. If these limits are exceeded, all of the expenses are taxable, not just the excess.

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(v) Recommended medical treatment costing up to £500 per employee per tax year. If the payments exceed £500, the full
amount is taxable.

Questions

1.
A private school offers free places to the children of its employees. The marginal cost to the school of providing each place is
£2,000 per annum, and the fee charged to the general public is £5,000 per annum.

John is an employee of the school.

(a) If John’s son attends the school for free, what is the taxable benefit to John for 2022-23?

(b) What is the taxable benefit if John pays £1,200 per annum for the place?

2.
Huey was provided with a house to live in by his employer throughout 2022-23. The house was not owned by the employer but
was rented from a third party at a monthly cost of £800. The house has an annual value of £6,500.

What is the taxable benefit to Huey for 2022-23?

3.
Dewy was provided with a flat to live in by his employer throughout 2022-23. The flat had been purchased by the employer in
May 2019 for £60,000. The flat has an annual value of £8,000.

What is the taxable benefit to Dewy for 2022-23?

4.
Stewie was provided with an apartment to live in by his employer throughout 2022-23. The apartment had been purchased by
the employer in July 2017 for £125,000. The apartment has an annual value of £10,000.

Assume an official rate of interest of 2%.

(a) What is the taxable benefit for 2022-23?

(b) How much is the taxable benefit if Stewie pays his employer £250 per month to live in the apartment?

5.
From 1 January 2021, Louie was provided with a house to live in by his employer, at which time the market value was
£175,000. The house had been purchased by the employer in July 2012 for £125,000. The house has an annual value of
£10,000. Louie occupied the house throughout 2022-23.

(a) What is the taxable benefit to Louie in 2022-23?

(b) What would the taxable benefit be for 2022-23 if Louie was first provided the house from 1 September 2022?

6.
Peter has been provided with living accommodation by his employer since 1 January 2019. The company had purchased the
property in 2018 for £160,000, and it was valued at £185,000 on 1 January 2019. Improvements costing £13,000 were made to
the property during June 2018. The annual value of the property is £8,225. Peter pays his employer £500 per month to live in
the property.

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What is the taxable benefit assessable on Peter for 2022-23?

7.
During the tax year 2022-23 Fashionable plc provided the following employees with company motor cars:

(a) Amanda was provided with a hybrid-electric company car throughout the tax year 2022-23. The motor car has a list price
of £37,200, an official CO2 emission rate of 24 grams per kilometre and an electric range of 90 miles.

Amanda made a capital contribution of £6,000 towards the cost of the car.

(b) Betty was provided with a new petrol car throughout 2022-23. The motor car has a list price of £16,400 and a CO 2
emission rate of 114 g/km.

Betty paid the company £1,000 during the year for the private use of the car.

(c) Charles was provided with a new diesel-powered company car on 6 August 2022. The motor car has a list price of £13,500
and an official CO2 rate of 102 g/km. However, Fashionable plc only paid £12,000 for the car because of a bulk discount
received. The car does not meet the RDE2 standard.

(d) Diana was provided with a new petrol car throughout 2022-23. The motor car has a list price of £87,600 and a CO 2
emission of 178 g/km.

Diana made a capital contribution of £3,000 towards the cost of the car, and also paid the company £1,200 during the tax
year for the private use of the car.

Calculate the car benefit assessable on each of the above employees in 2022-23.

8.
Continuing with the situations set out in question 7:

(a) Amanda was provided with fuel for private use throughout tax year 2022-23.

(b) Betty was provided with fuel for private use between 6 April 2022 and 31 December 2022.

(c) Charles was provided with fuel for private use between 6 August 2022 and 5 April 2023. He paid Fashionable plc £600
during 2022-23 towards the cost of the private fuel, although the actual cost of this fuel was £1,000.

(d) Diana was provided with fuel for private use throughout tax year 2022-23. She paid Fashionable plc £1,700 during 2022-
23 towards the cost of the private fuel. The actual cost of this fuel was £1,700.

Calculate the car fuel benefit assessable on each of the above employees in 2022-23.

9.
Freddy’s employer, Talbot Inc., purchased a television for £500 on 6 April 2021 and loaned it to Freddy throughout tax year
2021-22. On 6 April 2022, the television was given to Freddy to keep, at which time the market value was £300.

(a) Calculate the taxable benefit assessable on Freddy in 2021-22.

(b) Calculate the taxable benefit assessable on Freddy in 2022-23.

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10.
Gregory Stonehill is a project manager, earning an annual salary of £40,000. Mr. Stonehill is required to use his own car in the
performance of his job (visiting various project sites). In 2022-23, he drove a total of 16,000 miles in the performance of his
job.

Show the effect on Mr. Stonehill’s employment income if his employer gave him a mileage allowance of:

(a) 50p per mile, or

(b) 30p per mile.

11.
Aoshi was granted a loan of £20,000 by his employer on 1 January 2022. Interest is payable on the loan at 1% per annum. On 6
January 2023 Aoshi repaid £8,000 of the loan.

Calculate the benefit assessable on Aoshi for 2022-23 under:

(a) The strict method

(b) The average method

12.
Daniel was granted an interest-free loan of £10,000 by his employer on 1 July 2022.On 1 December 2022 his employer loaned
him an additional £5,000 (also interest-free).

Calculate the benefit assessable on Daniel for 2022-23 under:

(a) The strict method

(b) The average method

13.
Zach is employed by DOTS Ltd, earning a salary of £35,000 per year. During the tax year 2022-23 he received the following
benefits:

- An allowance of £14 per night to cover miscellaneous expenses for overseas business trips totaling 80 nights.

- £10,000 to assist with relocation costs.

- Workplace parking costing £400.

Calculate the total value of Zach’s employment income for the year 2022-23.