Employment earnings
Written by Ray Coman
Earnings from an office or employment, benefits, taxable social security benefits, pensions and foreign pensions are treated, under the tax system, as employment income. Employment earnings include:
- Pay, commission, bonus and overtime
- Statutory sick pay, holiday pay, paternity, maternity and adoption pay
- A general allowance is treated a pay. Although reimbursement of tax deductible expenses are not pay. For instance a car allowance is earning
- Readily convertible assets, such as shares in the employer’s company if listed on a stock exchange.
- Reimbursement for non-tax deductible costs such as commuting
- Restrictive covenants, taxable termination pay, retainers and inducments.
The tax year in which employment earnings are taxed
Gift or employment earnings?
Most times payments are made by an employer in accordance with a contractual agreement. However, it will not always be clear whether a payment is earnings. This is particularly the case with gifts.
Where the gift is anticipated by the recipient, such as tips for catering staff and taxi drivers, this will be regarded as income. However, where gifts are an unexpected award (e.g. on marriage) they are less likely to be taxable. Inducement payments (to encourage an employee to change jobs) are employment income.
The tax year in which employment earnings are taxed
Employment income is assessed on the receipts basis. Directors are often remunerated subject to the performance of the company. As such, a director’s income can be set well in advance of when it is paid. For directors, if earnings are determined before they are received, they will be taxed on earnings from the earlier of:
- The time when the earnings are entered to the company’s accounts, or
- If a director’s earnings for an accounting period are established before that accounting period ends, the earnings will be treated as paid on the date that the accounting period ends.
- If, however, the earnings for an accounting period are determined after the end of the accounting period, they will be treated as paid on the date that the remuneration is agreed, such as the date of the Annual General Meeting.
The receipts basis does not apply to non-cash benefits. A benefit is treated as taxable in the same tax year as it becomes available by the employee to be enjoyed.
Employment earnings are taxed via PAYE.
Reference to the taxation of employment, pension and social security income is outlined in the Income Tax, Earnings and Pensions) Act (2003)
Overseas workday relief
For the first three years of being UK resident, a person non-UK domiciled can claim overseas workday relief. Work for a foreign employer who is not domiciled in the UK would be outside the scope of UK tax.
