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Fixed deductions for expenses

Fixed deductions for expensesIntroductionIn certain circumstances, HMRC can agree an appropriate fixed rate amount (also called a flat rate expense) which can be deducted from earnings for tax purposes. These typically refer to certain classes of employees who are required to incur expenditure on things such as tools and clothing.For example, firefighters are entitled to a flat-rate allowance on the costs of cleaning and maintaining their uniforms where laundry services are not provided by their employers.These amounts should not be confused with round sum allowances which are discussed in the Round sum allowances guidance note which are generally treated as taxable income for the employee.Fixed deductions do not include the approved mileage rate for business travel using the employee’s own car. This is treated as business travel, see the Fuel-related payments / mileage payments guidance note.Fixed rate deductionsHMRC can agree fixed sum deductions that are negotiated with trade unions to apply to certain classes of employees. These are rates that employers may pay free of PAYE and reporting requirements, or that an employee may claim as a deduction where the expense is not reimbursed by the employer. These fixed rates are generally agreed in instances where it is burdensome for an employer or employee to administer expenses and the associated record keeping, eg where they have particularly large numbers of small payments. The fixed rate deduction covers the repair and replacement of clothes and equipment of certain classes of employees in certain types of industries. The full list of

Holiday pay

Holiday payIntroductionAs with any other cash payments to an employee, holiday pay should be included in payroll, and is subject to tax and Class 1 NIC. The key consideration is the timing of the payment to the employee and the impact that this has on the timing of the deduction of tax and NIC. Guidance on this subject is in HMRC’s CWG2 section 2.7.4.For employment law implications relating to holiday pay, please see the Holiday pay guidance note. For more on tax on holiday, see Simon’s Taxes E4.1113 and for NIC, see Simon’s Taxes E8.257. HMRC guidance starts at NIM09100.Normal payment timesIf an employer continues to pay the employee at the usual time, then the employer should continue to deduct PAYE and Class 1 NIC in the normal way.See Example 1.Payment in advanceIf the employer pays a weekly-paid employee in advance of a period of holiday, the PAYE procedures depend on whether the employee is on a cumulative tax code or a Week 1 tax code. See Example 2.The same principles apply to monthly-paid staff, but it is much more usual for monthly paid staff to be paid holiday pay at the normal payment time.Cumulative tax codeIf the employee is on a cumulative tax code, calculate and record tax to be deducted under PAYE as if the payment was being made on the payday for the last week of the holiday period.Typically, this will happen where individuals are paid weekly and have worked for a sufficient period of time

Setting up a payroll

Setting up a payrollIt may be stating the obvious, but to be an employer signifies that there are employees (or at least one employee). Depending on the employee(s) earnings, the employer may have to make certain statutory deductions from employees’ salaries and wages. Statutory deductions include income tax, national insurance contributions (NIC), student loan deductions (SLD) and attachment of earnings orders (AEO). These statutory deductions are all made via the payroll. The collection system for tax and NIC is called pay as you earn (PAYE).Registering with HMRCEven though there may only be one employee, an employer needs to register with HMRC if the employee(s):•has another job•is receiving a pension (state or occupational)•has earnings equal to or more than the lower earnings limit (LEL) for national insurance•is receiving benefits in kind from the employerRegistration needs to be undertaken before the first payday. The registration process can take up to two weeks and registration cannot be made more than two months before employees are first paid. The timescale for registering should also take account of the time constraints associated with registering for PAYE Online (see below).Registration can be by telephone or the internet. The information needed for registration is detailed in checklist 1 in Checklist ― setting up a payroll.Partnerships and limited companies need to supply further information, as do other types of organisations under certain circumstances. This additional information and the specific circumstances for other organisations can be found integrated in the registration process on the

Real time information

Real time informationReal time information (RTI) is the method by which employers communicate employees’ earnings and PAYE deductions to HMRC, unless an exemption from electronic filing can be claimed. See the Setting up a payroll guidance note.The term ‘employers’ in the RTI context also includes pension payers. Thus, employers who pay their own pensioners (possibly via a specific pensioners’ payroll) need to comply with the RTI regulations, as does the Department of Work and Pensions (DWP).Similarly in the RTI context, ‘employees’ includes pensioners. This includes pensioners paid by their ex-employers, pensioners paid by financial institutions such as insurance companies on behalf of the ex-employers and pensioners in receipt of the basic and additional state pensions and the new single tier state pension.There are penalties for failure to file the necessary RTI returns. See the RTI penalties guidance note.RTI replaced the previous year-end process and also changed the previous P45 / P46 in-year processes. Using the old terminology, RTI can be described as ‘P14+’ in that the main RTI return contains all the details previously found on the year-end P14 plus extras; the main extras are the details of the payments made to employees in the current pay period.The main RTI returns are described below.Full payment submissionThe full payment submission (FPS) is the normal return that employers must make to HMRC. It needs to be sent in respect of each pay period to be received by HMRC shortly before or at the time that payment is made to the employees.

Setting up overseas ― branch or subsidiary

Setting up overseas ― branch or subsidiaryAlthough a UK company can do a reasonable amount of business in another country without a taxable presence in that country, eventually the company may need to consider whether to establish a more formal presence in such a country, generally by way of a branch or subsidiary.The decision will often usually depend on commercial factors, particularly where there are regulatory requirements which demand, for example, a particular level of capital which is more easily satisfied through a branch structure where the parent company capital is taken into account.Where there is no particular commercial pressure for one legal form over another, tax issues may influence the decision by taking into account the local country’s tax position for branches and subsidiaries. For example, the parent company should consider:•is there any difference in tax rates between a branch and a subsidiary?•can profits be remitted back from the country to the UK in the same way? For example, the US has a branch profits withholding tax which is reduced to 5% in the UK / US tax treaty, but dividends paid from a US subsidiary to a UK parent company owning more than 80% of the share capital in the subsidiary for more than a year before the dividend is paid would not suffer any US withholding tax on the profits distributed by the subsidiary (see DT19867A)•can start-up losses in the entity be easily relieved against group profits?It is important to consider the classification

Payroll for pension schemes

Payroll for pension schemesSTOP PRESS: This guidance note may be affected by the changes to the taxation of pensions made by FA 2024, Sch 9 from 6 April 2024 onwards. The commentary below covers the rules that apply prior to that date. Before continuing your research, see the Abolition of the lifetime allowance guidance note.IntroductionIn general terms, running payroll for pension schemes is no different than running PAYE for employees. Pensions are treated as income for PAYE and so pensioners are issued with a tax code (see the PAYE notices of coding guidance note) and tax is deducted accordingly.The major difference between a ‘pensioner payroll’ and an ‘employee payroll’ is that no NIC is due on pensions (this is on the assumption that the pension is being paid from a pension scheme registered with HMRC).Deductions from pensionsApart from NICs, other deductions, with one further exception, can be made from pension payments in the same way as they are taken from earnings.Attachment of earnings orders (AEO)Pensions are treated as earnings for AEO purposes. Thus, AEO may be received in respect of pensioners.Voluntary deductionsThe pension payer needs authorisation from the pensioner in order to take voluntary deductions from the pension, see the Income and deductions guidance note.Student / postgraduate loansThe calculation for a student loan deduction (SLD) / postgraduate loan deduction (PGLD) is based on the earnings that are used to determine the amount of Class 1 NIC due (see the Student and postgraduate loan deductions guidance note).As a pension is

PAYE obligations

PAYE obligationsComing to work in the UKAn employee is subject to income tax if he is resident or carrying out employment duties in the UK. Just one day of work in the UK can result in a UK tax liability for the individual. It can also result in pay as you earn (PAYE) obligations for the employer. See the Setting up a payroll and Employees starting and leaving ― payroll consequences guidance notes.PAYE obligationsUnder normal procedures an employer is required to consider the status of any individual performing work on their behalf. See the Employment status ― why it matters guidance note. Payments to employees are required to be made under the PAYE regulations. However, registration is not required for an employer PAYE scheme if all employees are paid below the national insurance threshold (lower earnings limit) and do not have another job. Under real time information (RTI) reporting, an employer is required to operate PAYE, where at least one employee is earning at least the lower earnings limit, in which case all payments of earnings to all employees must be reported to HMRC, including those employees earning less than the lower earnings limit.If an individual has a contract with an overseas employer it may not be possible for HMRC to enforce the operation of UK PAYE regulations. In order to be liable to operate a PAYE scheme an overseas employer must have a presence in the UK (see the Non-resident employers and liability to PAYE in the UK

PAYE Settlement Agreements (PSA) ― overview

PAYE Settlement Agreements (PSA) ― overviewA PAYE Settlement Agreement (PSA) is an agreement between the employer and HMRC not to declare certain benefits and expenses on employees’ P11Ds and for the employer to settle the tax and NIC instead. Why use a PSA?PSAs are popular with employers because they avoid the requirement to complete P11Ds for certain benefits and also mean the employee does not bear the tax and NIC cost of the benefits included in the agreement. For example, gifts provided to employees or the provision of staff entertainment are generally liable to tax and NIC (see the Gifts and Entertainment ― staff guidance notes) but are provided by employers as a perk. The popularity of such gifts and events with the employees would therefore be reduced if they had to pay tax on the benefit. The PSA passes the tax and NIC liability on these benefits to the employer so the employee receives the benefit free of any tax or NIC.Using a PSA can save significant administrative costs as there is no need to report minor and incidental benefits individually; however, the tax and NIC cost is significant, so it will be necessary for the employer to balance the cost of tax and NIC versus time spent on administration.See Example 1.For more, see Simon’s Taxes E4.11110.Why might an employer not want to put a PSA in place?A PSA is expensive for the employer as it must pay grossed-up tax on the benefit as well as Class 1B

Payroll e-filing

Payroll e-filingE-filingPayroll e-filing is compulsory for virtually all employers. This is the case for both in-year and year-end filing. Most of the in-year and year-end filing requirements have now been overtaken by the introduction of real time information (RTI). See the Monthly payroll compliance, Annual payroll compliance and Real time information guidance notes.Employers exempted from electronic filing are those who are:•a practising member of a religious society or order whose beliefs are incompatible with the use of electronic communications•‘care and support’ employers ― these are employers who employ someone to provide domestic or personal services at or from the employer’s homeHMRC will also consider allowing an exemption from online filing for employers:•with a disability which prevents them from using computers•who cannot access an internet connection, including ‘dial up’•who are elderly and are unable to use an online channelThe exemptions, if granted, only apply to filing

Employee personal liability for PAYE or NIC

Employee personal liability for PAYE or NICUnder the Taxes Management Act 1970, an individual is under a general legal obligation to inform HMRC of changes in their personal circumstances that may affect their tax status or the amount of tax that is due. The introduction of self assessment under Finance Act 1994 and Finance Act 1995 resulted in employees having to take responsibility for their PAYE affairs as well as their other financial circumstances which may give rise to an additional income tax liability (or claim for a refund) or capital gains tax, etc.For employees, their tax situation is often straightforward and the correct amount of income tax is deducted via the PAYE system. However, there may be circumstances where too little tax has been deducted by the employer from the employee’s pay. Establishing the obligation to pay personal tax dueIf a tax underpayment arises, it may be necessary for HMRC to establish which party is responsible for this. As a starting point, it should be recognised that PAYE is not an exact process, rather it is intended to be a deduction made on account of an employee’s personal tax liability. The actual tax due may well differ from the PAYE tax, deducted correctly by the employer; if so the employee will be liable to pay any extra tax due. For example, this often happens if the individual has multiple concurrent sources of income, if the PAYE system is unable to recognise the correct personal allowances or tax rate