Employment vs Self- Employment
Employment
Receives taxable earnings from your employer
Employment is a contract OF service
Self-employment
Receive profits as trading income
Self-employment is a contract FOR services
Advantages: For the client
- No NIC liability
- No need to apply PAYE
- Saves administrative burden for the above
Advantages for worker:
- Income received gross with a delay before having to pay a tax bill – longer to pay my tax, I
got longer to plan
- Better deductibility of expenses
Factors to need to look to distinguish if employed or self-employed
Employment Self-Employment
Individual carries necessary equipment to work,
Can choose the place of work, the hours and
(likely but not always)
method of working
Has integral position in an organisation (e.g.
manager) Incurs personal or financial risk to do his duties
Has rights under employment law (holiday pay,
remuneration, benefits) Can hire other people to do the work
Suffers no financial or personal risk
Works for multiple clients
Types of Employment Income
Salary X
Bonus X
Commission/tips X
Benefits X
X
Allowable deductions (later in chapter) (X)
Employment Income X
Basis of assessment for employment income
Employment income = Income arising from contract OF service
General earnings = Employment Income + ‘cash equivalent’ for non-monetary benefits
When do we receive our earnings? – commonly tested Section A+B+part of C
Employees are assessed on the earlier of
- Cash receipt, or
- Employee becomes entitled to payment
If employee is director, the earlier of:
- Earlier of two mentioned above
The we compare that with:
- The time credited in company’s accounting records
- End of the company’s period of account
- The time the amount is determined (if after end of company’s period of account)
Pension income
Pension income is taxed on the amount accruing in the tax year, whether or not it has actually been
received.
Allowable deductions (from employment income)
In order for the deduction to be allowable, the expense has to be incurred wholly, exclusively and
necessarily in the performance of the employees duties
Allowable deductions:
Contributions into occupational pension scheme (chapter 5)
Fees of subscription to professional bodies (e.g. ACCA)
Travel Expenses
Capital allowances on Plant & Machinery provided by the employee
Donations under payroll giving scheme
Insurance premiums to cover director’s/employee’s liabilities (e.g. negligence)
If work from home – claim deduction for additional costs. Employers can pay up to £6 per
week without the need for supporting evidence
(However, cost of clothes for example is not deductible)
Travel Expenses
No deduction for home to work travel
If travel is necessary (to see client or going on a course) that is allowable deduction
Travel to temporary workplace is also deductible.
Travelling appointments
If someone has travelling appointment (e.g. service engineer) where travelling is an integral part of
the job. For these people, their duties will start from the time they leave their home, therefore only
those people can deduct travel expenses from home to work.
Site-based employees (e.g. computer consultant) can also deduct travel expenses
Temporary workplace
Cost of travel and accommodation to go to temporary workplace (e.g. Brighton) is allowable
deduction if this lasts up to 24 months. After this period, not allowable. If during that period the
plans change (e.g. becomes permanent or longer place of work), the minute it becomes
permanent/longer travel costs are denied.
Permanent workplace if:
- Spends 40% of working time in that place
- Period working there exceeds 24 months
Statutory approved millage allowances
*given in exam tables
Mileage Allowance
Up to 10,000 miles 45p
Over 10,000 miles 25p
- If less than statutory allowance given, a deduction for the shortfall is available
- If greater allowance given, the excess is a taxable benefit
Charitable deduction under they payroll deduction scheme
Employees can make charitable donations under the payroll deduction scheme
The donation is an allowable deduction
Tax relief is given at source (deducted from gross pay before calculating PAYE)
DO NOT GROSS THESE DONATIONS WITH GIFT AID DONATIONS – SEPARATE RELIEFS