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.
Restricted stock units, stock options and other share related pay
Personal allowance abatement
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.
PAYE coding notices
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.
Understanding the payslip
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.
Restricted stock units, stock options and other share related pay
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.
How Coman&Co can assist
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.
Comments
A tax code ending with L indicates that amount of allowance that is being used to determine the tax to deduct at source from your pay. You add a zero to the end of the numbers to determine the allowance. in your case, you are being given the benefit of £8,830 in the calculation of how much tax to deduct at source.
The X at the end indicates a non-cumulative code. This means that the pay to date and tax to date are not taken into account in calculating how much to deduct at source from your pay for a given month. You are usually given the X (or emergency code) because you did not provide a P45 when you started your job, but indicated (on a new starter form) that you have had another job since 6 April 2023.
A tax code has cash flow implication only. Therefore, if you think that your tax code is wrong, in this case because you should be getting more than £8,830 of allowance, you would have too much tax deducted at source. After the end of the tax year HMRC would calculate a repayment due to you for any overreduction of tax at source. If you compete a Tax return, the refund would be claimed via self-assessment.
I can assist with your Tax Return for this pupros3 if required. If you would prefer to have an increase in take home pay between now and March 2024, I can also assist with a PAYE Notice Query form. My fee for this service can be found on the pricing page of this website.
Are you able to help me with this?
It is possible to submit a PAYE Coding Notice query form. That should ensure that you do not have too much tax deducted at source from your other pay. State pension does not have tax deducted on it. So, the reduction in tax deducted at source would apply to other pensions, e.g. your workplace or private pension income. I can assist with preparing a PAYE Coding Notice Query form, and a summary of my fee can be viewed on the pricing page of this website.
If you defer a state pension and opt to receive backdated state pension as a lump sum, the entire lump sum is taxed according to your marginal rate for 2023/24. Therefore, if your income -including the 30 weeks of state pension- is below £50,270, the lump sum would be taxed at 20%. This applies even if the lump sum would take your total income above the higher rate tax threshold.
You can consider making pension contribution before the end of the tax year (i.e. 5 April 2024) to bring your taxable income to below £50,270. On the basis that you have started drawing on a pension, the maximum amount you can ‘recycle’ is £10,000 per annum.
Would you be able to look at their figures for me?
A stock option gives you the ability to purchase shares in the future at a given price. This is referred to as the exercise or strike price. If the value of the stock is below the strike price you would let the option lapse as it would be cheaper to buy the stock on the open market. The difference between what you pay and what the stock is worth on the day you purchase (or exercise) the stock is treated as employment earnings.
Restricted stock units are awarded to you as an employee. The restriction is usually that you have to have been with the company for a set duration. If you leave the company before that date, you would not be entitled to the shares. On agreeing to participate in the scheme you will be entitled to a certain number of shares (but unlike share options no promise is made about the price of the shares.) Usually you would accept the shares when they vest (i.e. when the restriction lifts and you become entitled to them.) Whatever the value of the shares when these are awarded is treated as employment earnings.
Usually share related pay are subject to tax and national insurance in exactly the same way as other employment earnings. In the less usual circumstance that your employer's company is not li listed, the pay would not be subject to national insurance. This is because the shares are not -readily convertible assets-.
I advise that you can check how your PAYE code is comprised with an online personal tax account. By accessing your tax account, you should be able to view PAYE Coding Notice. This notice will show you how your PAYE Code has been comprised. If you disagree with how your PAYE code has been calculated, please complete a PAYE Coding Notice Query form.
If you cannot view your PAYE Coding Notice, this could be because it was issued before you set up a personal tax account and in which HMRC should have posted it to you. Else, please telephone HMRC and ask to be sent a copy of it.