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Do you really know PAYE? If a customer tips a
Page 50
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driver is it tax-free? How about the Christmas party? To find out, read on...
pAYE is the system in which employers collect and account to the Inland Revenue for income tax and National Insurance Contributions (NICs) on their employees' salaries, bonuses and certain benefits. All employees and officers of a company are subject to Schedule E income tax (the PAYE obligation does not cover self-employed workers, who are responsfble for their own income tax and NICs).
A worker's tax status will depend on a number of factors. For example, does he provide his own tools? Is he free to hire other people to do the work? On what terms is he paid? Does he work for other people? Does he bear the risk and rewards of his labours?
If a worker is wrongly treated as self-employed the employer will be liable for the PAYE and NICs which should have been deducted—and may not be able to recover the full amount from the employee.
Other profits
Employees are subject to Schedule E income tax not only or all wages or salaries but also on any other profits earned from the employment. This includes bonuses, commissions, tips and some benefits in kind.
Payments to induce an employee to take up or leave employment are also likely to be subject to tax and should be accounted for under the PAYE system. However, a partial exemption for payments up to £30,000 may be available for payments made to employees whose jobs are redundant.
Whether a benefit in kind is taxable depends on the employee's level of earnings. Certain benefits are chargeable to income tax for all employees, while others are only chargeable for directors or employees earning at least 18,500 per year.
The income tax and NICs on certain benefits in kind are also payable by the employer under the PAYE system.
Income tax
All employees will be chargeable to income tax which is collected under the PAYE system on any "readily convertible assets" such as shares which the employee can sell quickly and convert into cash.
Other benefits chargeable for all employees include the provision of living accommodation by an employer, payments made in vouchers and the discharge of a loan by the employer.
However, certain vouchers are exempt from the charge to income tax, including some transport vouchers and vouchers in connection with sporting and recreational facilities. Luncheon vouch
ers are also exempt up to a value of 15p per day (the reason for this measly sum remaining unchanged is that few employers now offer such vouchers).
Directors and employees earning more than £8,500 per year will also be subject to income tax on certain other benefits. These include company cars, the provision of medical insurance and discounted loans made to employees. The tax on these benefits is payable by the employer under the PAYE system.
However there are certain benefits which are exempt from income tax, Including employers' contributions to a personal pension scheme, free parking, sports facilities and mobile phones, Social functions organised for employees are also exempt, up to a certain limit.
It is not only benefits provided by an employer which are taxable, but also those provided by third parties. Tips or gifts from customers and suppers, incentive award schemes or entry in a prize draw are also caught in the tax net. If the award scheme is a suggestion scheme which encourages employees to suggest ways of improving efficiency, then provided the scheme meets certain conditions and the awards do not exceed certain limits there will be no charge to income tax.
For benefits which are shared among several employees—for example the provision of social functions—it might be possible to enter into a PAYE settlement agreement with the Inland Revenue. This allows an employer to make a single annual payment covering the income tax and NICs due on the benefits and, again, this avoids the reed to account for such items through PAYE.
Employers have both monthly and end-of-year obligations covering the recording and reporting of these issues.
Form P11 should be completed each month recording all employees' pay and deductions. Monthly payments in respect of income tax and NICs must be recorded on form P32 and payment should reach the Inland Revenue by the 19th of K month. However, for smaller employ( whose average monthly payments less than 21,500, it is possible to pay qu terly instead of monthly.
At the year end the employer m send to the Inland Revenue form I showing a summary of all pay and ded tions, and form P35 showing the total and NICs deducted for all employe Farms P110 and P90 must also be cc pleted for any benefits in kind.
Forms P14 and P35 must be returr by 19 May following the end of each year and forms P110 and P90 by 6 J Penalties will be incurred if these for are returned late ( see below).
All income tax and NICs due to 1 Revenue must be paid by the 19th each month. Interest will be charged any amounts outstanding at the end the tax year which are not paid by following 19 April, There are heavy penalties for late filing of end of year returns. For P14s and P35s the penalty is 2100 every 50 for part of 50) employees every month (or part month) that return is late.
Tax districts
For Ms and P9D5 the penalties arE the tax districts' discretion; howe, they can be up to £60 for each day t the returns are late. If the P110 or P9I completed fraudulently or negligei the employer can be liable to a perk of up to 23,000.
One last thing—should you decicir throw a Christmas party, the Ink Revenue generously allows you 275 employee tax-free although, as a dir tor, you are not entitled to the same p sonal allowance. Cheers!
• by David Jervis David Jervis is a partner of solicitors I Eversheds. More information on PAYE system can be found in employer section of the Inland Reve website at www.intandrevenue.govuk.