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Employment earnings

 

Written by Ray Coman

 

Employment earningsEarnings 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:

 

Gift or employment earnings?

The tax year in which employment earnings are taxed

Overseas workday relief

 

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.

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