EMPLOYMENT INCOME
EMPLOYMENT OR SELF EMPLOYMENT ?
The distinction between employment and self-employment is fundamental:
an employee is taxable under the employment income provisions
a self-employed person is assessed on the profits derived from his, her or
their trade, profession or vocation, under the trading income provisions.
INDICATORS
The degree of control exercised over the person doing the work (a high
level of control indicates employment )
Whether the worker must accept future work ( if yes , indicates
employment )
Whether the person who has offered work must provide further work ( if
yes, indicates employment )
Whether the worker provides their own equipment ( if yes , indicates self
employment )
Whether the workers hire their own helpers ( if yes , indicates self
employment )
What degree of financial risk the workers takes ( if high risk , indicates self
employment )
What degree of responsibility for investment and management the worker
has (if most of responsibility is the worker’s , indicates self – employment )
Whether the worker can profit from sound management (if can do so ,
indicates self employment )
Whether the works for a number of different people or organizations
(working for just one person or organization indicates employment )
The wording used in any agreement between the worker and the person
for whom they perform work ( but not conclusive about the actual legal
relationship between them )
Pro-Forma Computation
£
Salary x
Bonus / commission x
Benefits x
Expense allowances (or reimbursed expenses)
Cash voucher x
Less: Allowable deductions
Expenses incurred wholly , exclusively and necessarily (x)
contributions into employer’s occupational pension schemes (x)
Subscription to professional bodies (x)
Charitable donation : payroll deduction scheme
Travel and subsistence expenses
Use of own car – mileage allowance (x)
(x)
Income from employment
EARNINGS
Earnings include salary , Bonus , wages , commission , Benefits ( see next chapter )
Assessable earnings
All directors and employees are assessed on the amount of earnings
received in the tax year (the receipts basis).
The term ‘earnings’ includes not only cash wages or salary, but also bonuses,
commission, round sum allowances and benefits made available to the
employee by the employer.
The date earnings are received
The date of receipt is the earlier of the following:
actual payment of, or on account of, earnings
becoming entitled to such a payment.
In the case of directors, who are in a position to manipulate the timing of
payments, there are extra rules.
They are deemed to receive earnings on the earliest of four dates; the two
general rules set out above, and the following two rules:
when sums on account of earnings are credited in the company's accounts
where earnings are determined:
– before the end of a period of account = the end of that period
– after the end of a period of account = date the earnings are determined.
EX 1:
A Plc. Makes accounts up to 31st march every year . For the accounting year
31.3.25 . Find the date of determination of earnings if :
a) Earnings are determined on 15th march 2025
b) When earnings are determined on 25th April 2025
ALLOWABLE DEDUCTIONS:
The general rule is that the expense must be incurred wholly, exclusively and
necessarily for the performance of the duties of the employment.
Travel and subsistence expenditure
Travel expenses may be deducted only where they:
→ are incurred necessarily in the performance of the duties of the
employment. or
• are attributable to the necessary attendance at any place by the employee in
the performance of their duties.
Relief is not given for the cost of journeys that are ordinary commuting or for
the cost of private travel.
Ordinary commuting is the journey made each day between home and a
permanent workplace, or to a place which is essentially the same as the
workplace (i.e. situated nearby).
Private travel is a journey between home and any other place that is not for
the purposes of work.
A temporary workplace is defined as one where an employee goes to perform
a task of limited duration, or for a temporary purpose.
A place of work will not be classed as a temporary workplace where an
employee works there continuously for a period which lasts, or is expected to
last, more than 24 months.
Where an employee passes their normal permanent workplace on the way to
a temporary workplace, relief will still be available provided the employee
does not stop at the normal workplace, or any stop is incidental (e.g. to pick up
some papers).
Where an employee’s business journey qualifies for relief, then the amount of
relief is the full cost of that journey. There is no need to take account of any
savings the employee makes by not having to make the normal commuting
journey to work.
Reimbursement of employee’s expenses by the employer
Where an employee is reimbursed expenses by the employer, the amount
received is taxable income. However, an exemption applies where the employee
would be able to claim a tax deduction for the business related expenses under
the rules set out above e.g. business travel, professional subscriptions, expenses
which fall within the wholly, exclusively and necessarily provisions.
Where an expense is partly allowable and partly disallowable, then the exemption
can be applied to the allowable part. For example, where an employee’s home
telephone bill is fully reimbursed, the exemption can be applied to the business
calls, but not to the private calls and the line rental.
OTHER DEDCTIONS :
Certain expenditure are specifically deductible in computing net taxable earnings :
Contributions to registered occupational pension scheme
Subscription to professional bodies (Such as ACCA)
Payments for certain liabilities relating to the employment for insurance
against them .
Capital allowances are available for plant and machinery necessarily
provided by an employee for use in his/her duties .
Payroll deduction scheme
Under the payroll deduction scheme an employee authorises his, her or
their employer to make deductions from the employee’s salary and pay the
amounts over to specified charities.
There is no limit on the amount of donations that an employee can make
under the scheme.
The donations are deducted from the employee’s gross pay before tax
(PAYE) is applied to the taxable pay.
Approved mileage allowance payments (AMAPs)
Employees who use their own cars for business purposes are normally paid a
mileage allowance by their employer.
HMRC approved mileage rates which are tax allowable are as follows:
First 10,000 miles p.a. 45p
Over 10,000 miles p.a. 25p
If the mileage allowance paid by the employer = the AMAP: No
benefit/expense arises
Where payments made to the employee > the AMAP: Excess = assessed on
the employee as a benefit
Where the payment to the employee < the AMAP: Difference = allowable
deduction from employee’s employment income.
QUESTIONS
[Link] is a marketing manager and is employed by Drums Ltd . During the tax
year 2024/25 she incurred the following expenses in connection with her
emplyement , all of which were reimbursed by Drums Ltd
Home phone
- Line rental 100
- Business calls 85
Subscription to local gym 1200
Subscription to the chartered institute of marketing 600
Train fares to attend meeting at client premises 500
State the tax position of the reimbursed expenses and explain how they
should be treated by drums ltd and Adrien
2. Joseph has travelled 12,000 business miles in the tax year 2024/25, in his
own [Link] employer pays him 42p per mile for each business mile.
(a) Calculate how much of the mileage allowance is taxable.
(b) Explain how your answer would differ, if Joseph's employer paid 35p per
mile.
3. Kate uses her own 1800 cc motor car for business travel. During 2024/25
she drove 15,000 miles in the performance of her duties. Her employer pays
her 30p per mile.
Compute the allowable deduction that the Kate can claim against her
employment income.
4.U is employed as an insurance salesman at a monthly salary or 950. in
addition to his basic salary, he receives a bonus that is paid in May each year,
and relates to the sales he achieved in the year to the previous 31 October.
His bonuses are as follows
Bonus for year to: paid during : amount
31 October 2022 May 2022 1920
31 October 2023 May 2024 1260
31 October 2024 May 2025 2700
U made the following payments in respect of his employment in the tax year
2024/25.
Contribution to occupational pension scheme 343
Subscription to Chartered Insurance Institute 100
Payroll deduction scheme (in favour of Oxfam) 200
Compute U's assessable income from employment for the tax year 2024/25-
5. Jack and Jill are employed by Marvel plc. Jack is a director of Marvel plc. Jill
is not a director of Marvel plc. Marvel plc. makes up its accounts to 31 March
each [Link] were awarded by Marvel plc. as follows:
Jack:
€5,[Link] amount was determined by the directors on 28 February 2025
and credited to Jack's director's account on 10 March 2025, subject to a
condition that she could not draw down the bonus until 15 April 2025, on
which date she became entitled to payment of the bonus. Jack was actually
paid the bonus on 28 April 2025.
Jill:
£3,000. jill became entitled to be paid this bonus on 31 March 2024, but
agreed that payment should be delayed due to Marvel plc's cash flow
problems. He was actually paid the bonus on 30 April 2024.
Explain when each of the bonuses is received for the purposes of
employment income and so determine the tax year in which it will be taxed.