Business Tax Guidance: Calculation Of Taxable Income And Exempted Benefits
Calculation of Taxable Income
Describe about the Business Tax for Guidance?
Calculation of Taxable Income of Susan Phillips
Annual Salary – £89031
Add: -Value of benefit of Accommodation (Note 1) – £12554
Value of Car benefit (AS per HMRC) – £8715
Value of Fuel Charges Benefit (AS per HMRC) – £7595
Value of Furniture (Note 2) – £7000
Basic Personal Allowance (Note 3) – £10000
Gross Salary of Susan – £ 134895
Interest on Building Society Account –£ 6745
Dividend -£13490
Total Income £155130
Notes: –
Note 1
Rentable Value of Flat is £ 8800 (£ 9600*11/12).
Add: – Addition Charges – £3754 (180000+21000-75000)*3.5% {When Value of Accommodation is more than £ 75000 than addition charges will be added on basic taxable value of Accommodation. Calculated as- (Cost of Accommodation -75000)* HRMC Interest Rate.
Note 2
Value of Furniture is calculated at the rate of 20% of Cost of Furniture.
Note 3
Value of Basic Personal Allowance is taken as £ 10000 unless Tax Payer born before 6 April 1948.
Calculation of Tax Payable £141640
Tax on Income other than Dividend = £31865*20% + £109775*40%
=£6373+ £43910
= £50283
Tax on Divided = £13490 * 10% = £1349
Total Tax Payable = £51632
Less: – Claim of Donation
25% (Additional Rate – Basic Rate) of Donation Paid – £2698*25%
= £675
Net Tax Payable= £50957
National Insurance Contribution = £155130*2%
=£3103
Recommendation for Car
Susan Phillips should choose Car BMW X6.
Manufacturer of Car – BMW
Model of Car – BMW X6 3.0TD xDrive 30d5dr 4WD
Price of Car- £24900
Type of Engine – 2993 CC Diesel Engine.
CO2 emission – 217 g/Km
BMW X6 is SUV Car with the Diesel engine of Capacity of 2993 CC with Automatic Gear feature. This car is in budget provided by the company to Susan Phillips. Safety features of car are Parking Aid, Head, side and Driver Air Bag, child lock, Electronic break Force distribution, anti-lock brakes and Heat Restraints etc.
Part II
Salary of a person includes salary paid in cash or kind and non-cash benefit provided to employees. These benefits include free accommodation, motor car facility, contribution to pension scheme, canteen facility at cheaper rate or free etc.
Cheap Rate Meal or Free Meal at Canteen: – Facility of Cheap Rate Meal or fee Meal at canteen provided will be exempted. This service is exempted if provided to whole employees or to particular class of employees.
Contribution to Approved Pension: -Any Contribution made by employer to approved pension fund will be exempted.
Traveling facility: – Traveling Facility provided by company to come to work and return from work to home. Such traveling facility is not taxable.
Equipment to help Disable person to work: – If employee is disable and any equipment and facility provided to support such employees towards work will not be taxable.
Benefits exempted with certain conditions: –
Accommodation Facility: –
Accommodation facility means rent free or lower rate accommodation facility to employees. Accommodation facility will be exempted if: –
Exempted Benefits Provided
If it is necessary to provide accommodation for performing the job effectively, like job of school caretaker.
If it is necessary for security reasons like Employees of Armed Force etc.
Other than above case accommodation is provide to employees free or at lower rent than it will be included in the gross salary and taxable in hands of employee.
When No Rent is charged for Accommodation provided to employee than gross rentable value will be taken as value of benefit of accommodation.
When rent is charged at lower rate in comparison to market rent; than difference between market rent and rent charged from employee.
Car or Vans
Tax on Car is not payable if car is used for company propose. If Car is used for private purpose than value of car is taxable. Car is not taxable even if car powered electrically.
Money paid for Fuel will be taxable unless used for work purpose.
Child Care Expenses: –
If any amount received amount received against child care expenses will be exempted up to certain limit: –
£ 55 per week for Basic Rate Tax payer
£ 28 per week for Basic Rate Tax payer
£ 25 per week for Basic Rate Tax payer
Clothing
Clothing provide by employer for work and safety during will not be taxable. Normal clothing will be taxable to Employees.
Training Expenses
Any money spent on training on employee is Tax free. Beside training expenses other expense related to training like traveling expenses and training material fees are tax free.
Salary to Susan Phillips: -Salary Received by Susan Phillips is £ 89031 which excludes other benefits provided by the company.
Value of Other Benefits:-
Car provided by the Company: – Value of Car provided by company will be Taxable Benefit. Value of Fuel Benefit is also taxable benefit. Value of Car and Fuel Benefit can be calculated using HMRC Calculator.
Flat provided by Company: – Value of Flat or Accommodation is taken rentable value of Flat.
Rentable Value of Flat is £ 8800 (£ 9600*11/12).
Add: – Addition Charges – £3754 (180000+21000-75000)*3.5% {When Value of Accommodation is more than £ 75000 than addition charges will be added on basic taxable value of Accommodation. Calculated as- (Cost of Accommodation -75000)* HRMC Interest Rate.
Value of Furniture is calculated at the rate of 20% of Cost of Furniture.
Value of Basic Personal Allowance is taken as £ 10000 unless Tax Payer born before 6 April 1948.
Gross Salary = Salary Received by Susan Phillips + Value Benefits
Gross Salary = £ 89031 + £ 45854.
Gross Salary = £134895
Interest Received on Building: –
Interest on Building from Society = 5% of Gross Salary
Gross Salary = £ 134895
Hence, Interest on Building = 5%* £ 143895
= £ 6745
Dividend on Investment: –
Dividend on Investment is 10% of Gross Salary
Gross Salary = £ 134895
Hence, Dividend on Investment = £ 134895*10%
= £ 13490
Recommendation for Car
Total Income = Gross Salary + Interest on Building from Society + Dividend
Total Income = £ 134895 + £ 6745 + £ 13490
Total Income = £ 155130
Rate of Tax
|
Rate |
Dividend income |
Savings income |
Employment and other income |
Income bracket |
|
Starting rate |
– |
10% |
– |
£0 – £2,880 |
|
Basic rate |
10% |
20% |
20% |
£0 – £31,865 |
|
Higher rate |
32.5% |
40% |
40% |
£31,866- £150,000 |
|
Additional rate |
37.5% |
45% |
45% |
Over £150,000 |
Rate of Tax on Susan Phillip’s Income is Additional Rate i.e. 37.5% Dividend Income and 45 % on Income other than Dividend.
Hence Rate of Tax is Different Income we need to also calculate separately.
Dividend Income =£ 13490
Tax on Dividend Income = £ 13490 * 10%
Tax on Dividend on Income = £ 1349
Income Other than Dividend Income = Gross Salary + Interest on Building from Society
Income other than Dividend Income = £ 134895 + £ 6745
Income other than Divided Income = £ 141640
Tax on Income other than Dividend Income =
For Income up to £31865
£31865*20% = £6373
For Income £31865 -£141640
£109775*40% = £43910
Tax on Income other than Dividend Income = £50283
Total Tax Payable = Tax on Dividend Income + Tax on Income other than Dividend Income
Total Tax Payable = £ 1349 + £ 50283
Total Tax Payable = £ 51632
Less: – Deduction of Claim for Donation
Deduction of Claim for Donation = Donation * (Higher Rate Tax – Basic Rate)
Donation = 2 % of Gross Salary
Gross Salary = 134895
Hence Donation = 134895 * 2%
Donation = £ 2698
Deduction of Claim for Donation = £ 2698 * (45% -20%)
Deduction of Claim for Donation = £ 2698 * 25%
Deduction of Claim for Donation = £ 675
Net Tax Payable = Total Taxable – Deduction of Claim for Donation
Net Tax Payable = £ 51632 – £ 675
Net Tax Payable = £ 50957
Calculation of National Insurance Contribution: – 2% of Taxable Income { If Tax Payer earns more than £41865 than Contribution will 2% of Taxable Income)
= 155130*2% = 3103
Part III
Tax Codes and Tax Prefixes: – Tax code is code used by HMRC to guide or instruct employer to deduct Tax from wages or salary or pension. Tax code is combination of alphabetic letters and numbers.
Tax code is used to identify how tax should be adjusted and getting the tax due on income of employees.
Tax Prefixes is letter in Tax code shows which Tax allowances employee receiving.
If Tax Prefixes L is used means Employees was born after 5 April 1948 and Employee eligible for personal allowances. This code is also used when employee taxed on the emergency code.
If Tax Prefix P is used means Employees was born between 6 April 1938 and 5 April 1948 and Employee entitled to full aged personal allowances.
If Tax Prefix Y is used means Employees was born before 6 April 1938 and Employee entitled to full aged personal allowances.
If Tax Prefix P is used means either Employee was born before 6 April 1938 and 5 April 1948 and Employee entitled to full aged personal allowances or employee not want to revel actual code.
Part II: Exempted Benefits with Certain Conditions
If Tax Prefix K is used means total Tax allowances less than total Tax deduction. Employee has to provide K code if his/her income includes pension or Social Security Benefit or interest etc.
If Tax Prefix BR is used means no allowance given to employee and tax will deducted at basic rate.
If Tax Prefix NT is used means employee is not liable to pay.
If Tax Prefix DO is used means employee’s income taxed at higher rate (40%).
If Tax Prefix OT used means no allowances given and employee liable to tax as per level of his/her income.
-PAYE (Pay as You Earn) is a system of payment method of Income Tax and Contribution to National Insurance. Employer has to deduct Tax and National Insurance Contribution from wages or salary or pension paid or to be paid. Employer is responsible for deducting tax and sending tax to HM Revenue and Customs (HMRC). Employee has to give pay slip daily show details Wages, Tax deducted and National Insurance Contribution. Employee has to give form P60 after every tax year to employees shoeing details total paid to employees and amount deducted as Tax and Contribution to National Insurance.
PAYE Forms: – PAYE forms are forms used by employer to send details of wages paid, Tax deducted, and Contribution to National Insurance.
PAYE Form P45: – PAYE Form P45 will be given when employees stop working. P45 shows how much salary paid so far in current Tax year. P$5 Form has 4 parts named as Part 1, Part 1A, Part 2 and Part 3. Part 1 is used to send information to HM Revenue and Customs (HMRC). Part 2 and 3 send to new employer of employee. Part1A is used for records of employees.
PAYE Form P60: – PAYE Form P60 is issued to employees by employer after completion of Tax year (6 April to 5 April) before 31 May of next Year. Employees have proof of their Income earned and a proof of Tax deposit and needed to claim overpaid Tax if any.
PAYE Form P11D: – When employer provides non cash benefit to employee (For Example Rent Free Accommodation, Car Facility, Interest Free Loan etc.) than employer is liable to send details HM Revenue and Customs (HMRC) of non –cash benefits provided by employer to employees in PAYE form P11D. Employer is liable by law when value of such benefits exceeds £8500. Generally employer provides a copy of PAYE Form P11D to Employee.
Annual Return Forms
Every employer is liable to file annual return on before of 19 May of next year to tax year inn either Form P35 or P14s.
Employer has to send annual return in Form P14 if employer had maintained each employer record in form P11 or similar form.
Employer has to send annual return in Form P35 if employer summarizes all records of Tax year.
Real Time Information
Real Time Information is submission of Payroll Information to HM Revenue and Customs (HMRC) every time when employee’s salary or wages paid. Employer need to submit Full Payment Submission (FPS) even there is no payment made in particular month. In such employer has to send No FPS to HMRC. Employer has to send FPS to HMRC on or before 19th Day of next following month.
Penalties for Non- Compliances: –
Non- Compliances PAYE Norms attract penal provisions. When employer fails to file return than there is provision of penalty charged and if employer delays in payment of PAYE than interest will be charged.
Rates of Interest for Delay payment of PAYE: –
If Employees delays in payment of 1 to 3 months than 1% of total amount paid late.
If Employees delays in payment of 4 to 6 months than 2% of total amount paid late.
If Employees delays in payment of 7 to 9 months than 1% of total amount paid late.
If Employees delays in payment for more than 10 months than 4% of total amount paid late.
Penalty for Delay Filing of Return Forms: –
If Employer fails to file return for delay of more than 4 months than HRMC issued notice shorter after 19th September and then after on following January and May. £100 per 50 employees per month will penalized for every month of delay of return forms.
References:-
ANON, N.D., “Running Payroll”, Accessed on 24 Feb 2015,
<https://www.gov.uk/running-payroll/fps-after-payday>
ANON, N.D., “How to Avoid RTI Penalties and Fines”, Accessed on 24 Feb 2015, <https://uk.sageone.com/2014/01/10/how-to-avoid-rti-penalties-and-fines/K>
ANON, N.D., “PAYE Forms: P45, P60, P11D”, Accessed on 24 Feb 2015, <https://www.gov.uk/paye-forms-p45-p60-p11d/p11d>
ANON, N.D., “Business Tax – Guidance”, Accessed on 24 Feb 2015,< https://www.gov.uk/find-out-which-employers-are-exempt-from-online-payroll-reporting>
ANON, N.D., “Tax Returns”, Accessed on 24 Feb 2015, <https://www.adviceguide.org.uk/wales/tax_w/tax_how_to_pay_income_tax_e/tax_returns.htm>