Employment and PAYE advice
Written by Ray Coman
For an employee, tax is usually the single largest cost in their life, probably surpassing mortgage repayment. For higher earners, tax gets close to half their pay. We understand why our employee clients are focused on tax, seek to understand how tax works and are keen not to overpay. PAYE can get confusing.
A person earing over £100,000 a year is required to file a Tax Return. We offer a competitively priced Tax Return preparation service. As part of this service, we can review payslips and PAYE codes and explain why too much or too little tax was deducted at source. We can explain the implication of pension, company shares, and any income from outside of employment. We offer tax advice on anything related to UK tax and so can provide continuity of service as circumstances change.
Supplied with the explanations and advice we provide, our clients can feel confident in dealing HMRC, payroll departments, employers, lenders and anyone else who should take an interest in their tax affairs.
For every £2 that total income exceeds £100,000, £1 of personal allowance is abated. This creates an effective rate of tax of 60% where income is between £100,000 and double the personal allowance.
The personal allowance for 2021/22 is £12,570. The allowance doubled is equal to £25,140. Therefore, for 2021/22 when income is between £100,000 and £125,140, the marginal rate of tax is 60%.
The higher rate tax threshold is 40% plus half as much again for the £1 of personal allowance lost for every increase of £2 in income.
Usually, the more accessible method for reinstating personal allowance is via additional pension contributions. A pension contribution reduces taxable income. If income is considerably higher than £125,140, it may be impractical to consider additional contributions as a tax mitigation approach.
Tax relief on pension contributions is obtained in the tax year in which pensions are paid. Effective tax planning is achieved by a review of pay and pension prior to the tax year.
We can assist with a number of issues relate to PAYE Coding Notices. This includes, underpaid tax or debts for previous years, requesting the collection of tax via payroll, checking the tax code being used by an employer is correct and requesting a review of the tax code to correct for too much tax being deducted at source. Our service can help cash flow by ensuring our clients do not overpay tax at source. We can also correct where too little tax is being deducted at source and the taxpayer wishes to avoid a nasty surprise after the end of the tax year.
A payslip is confusing, but we have years of experience in understanding this document. Benefits which are coded in can cause confusion especially as some, such as medical insurance are taxable, while others such as life cover is not taxable. Occasionally, a non-cumulative tax code is used meaning that pay and tax of previous months are not considered in calculating the pay for a given month.
Share options are a popular form of pay for publicly listed employers. The employer obtains corporation tax relief for the value of the share award. In the case of share options, the amount deducted from taxable profits is value of the share, less exercise price. Share related pay incentivises employees through participation in the overall success of the business. Usually, a stock is conditional on serving a fixed duration of employ. This is often called Restricted Stock Unit. The conditional nature is intended to inspire loyalty.
The value of shares at the date of exercise determines the amount which is liable to tax. For an additional rate taxpayer, the tax could be as high as 45% (plus 2% national insurance.) Typically, enough shares are sold to cover the tax liability with the remainder of shares transferred to the employee.
Any appreciation in value between exercise date and eventual sale will be subject to capital gains tax in the hands of the recipient. If bought and sold on the same day, it is unlikely that the gains will exceed the capital gains tax annual allowance. However, the disposal of shares required to cover tax plus any subsequent disposal, could bring proceed above the reporting threshold.
Various schemes confer tax benefits to both employer and employee. Approved schemes, include, save-as-you earn, company share option plans and enterprise management incentives. Owing to the conditions required for approval, many larger employer offer share incentive plans which are unapproved.
Typical scenarios that we advise on include:
- A request for additional payment of tax from HMRC.
- Employment related expenses, especially where not reimbursed by employer, such as a subscription to a medical association
- Private pension contributions, charity payments or investments in schemes which allow tax relief.
- Company shares with particular tax incentives.
- Becoming a director or shareholder by the employer.
HMRC advise that directors and all taxpayers with earnings over £100,000 should complete a Tax Return. With the increasing burden and complexity of tax, we would be pleased to review an employment related query and advise accordingly. If required, we can also provide an annual service including Tax Return completion. The initial meeting is free of charge.