Of course the UK tax system, thankfully, does not work in such a simplified manner.
The PAYE system ensures that our taxes are evenly distributed throughout the tax year In 2016 every penny that the average person earned for working up to and including 2 June 2016 went to HM Government. So that means from 3 June we were all finally working for ourselves! Tax Freedom day is calculated on Mr or Mrs Average. However our aim at Dataplan is, through legitimate means of course, to move that date back towards the end of May (metaphorically speaking) So with that in mind here are our 10 Tax Saving ideas for employees.
1) Marriage Allowance
The Marriage Allowance allows you to transfer £1100 of your personal allowance to your husband, wife or civil partner, if they earn more than you. To benefit as a couple the lower earner must have an income of £11000 or less. The transfer of the personal allowance will reduce the tax bill of your spouse by up to £220.
So who can apply? Needless to say there are set criteria, however you can get Marriage Allowance if all the following apply
- You’re married or in a civil partnership
- You don’t earn anything or your income is under £11500
- Your partners income is between £11501 and £45000
2) Employee Tax Codes
Ensuring the right amount of tax is taken from employees relies on that the correct PAYE tax code is issued by HMRC. HMRC’s PAYE Real Time Information should ensure that code numbers are amended on a timely basis. However a tax code is dependent on the correct information being fed into it.
It is the employee, not the employer, who is responsible for the accuracy of the code. Around 5 million PAYE employee’s code numbers are incorrect, for a variety of reasons. All employees should therefore check their tax code and if they consider it is incorrect contact HMRC without delay. The chances are tax is being overpaid.
3) Company Car and Fuel
What tax savings can there be if I have a company car and fuel provided by my employer? Firstly, check your P11D. Ensure the list price, CO2 emissions and all dates are correct. Secondly, do you need to have all fuel provided? A fuel benefit only applies if fuel for private travel is provided by the employer.
For a fuel benefit to be cost effective, employees must have private mileage (home to work is private) of around 7500 for a basic rate taxpayer and 15000 for a higher rate taxpayer per annum. So unless this extent of private travel is done, consider providing all your fuel needs for the vehicle, including for business.
Does that mean I will pay for all business mileage? No, you can claim a mileage rate from your employer to cover every mile you travel on business.
4) Pension Contributions
Although the pension world for employees has changed since auto-enrolment, employees with personal pensions can still claim tax relief for their contributions. Tax relief is ordinarily claimed through the self-assessment system. However employees should seriously consider paying those contributions through a salary sacrifice.
A salary sacrifice allows employees to amend their contract of employment effectively reducing their Gross pay by the amount of the pension contribution. The positive affect of this is that they get tax relief immediately. However there is also an employee national insurance contribution saving of 12% on the pension payment.
So for a basic rate taxpayer the saving is 20% for tax and 12% for National Insurance, a total of 32%. A £100 contribution therefore only costs the employee £68.
5) Salary Sacrifice
HMRC have announced , following a consultation, amendments to Salary Sacrifice arrangements restricting the range of benefits that can be included in a Salary sacrifice and therefore attract reduced income tax and national insurance.
However not all Salary Sacrifices are under the spotlight. So what is a salary sacrifice and will it still remain an effective tool for reducing tax and NIC effectively and legally?
A Salary Sacrifice is an agreement between an employer and an employee to change the terms of the employment contract to reduce the employee’s entitlement to cash pay. Sounds serious? Think again. A salary sacrifice is a very efficient tax planning tool for certain non-cash benefits.
Pensions, as mentioned above, are the prime candidate for a salary sacrifice but it doesn’t stop there. Employees can use a salary sacrifice to:
- Buy additional holiday
- Cycle to work scheme
- Pay for childcare provision
- Car parking
As an example of the benefits, for a basic rate taxpayer contributing £100 into a pension, £20 tax will be saved and £12 National Insurance. The £100 contribution therefore only costs £68.
6) Professional Fees
If you pay professional fees or subscriptions in relation to an annual membership of a professional organisation tax relief is available on the payments made. Perhaps surprisingly, this also applies to certain union subscriptions, for instance teachers.
Each year HMRC publish a list of professional bodies and organisation that they accept are employment related and therefore qualify for tax relief. So how do you obtain the relief? Well, if you complete a Self- Assessment Tax Return you include the claim in the return. If you do not complete a tax return, a claim can still be made by completing a form P87. HMRC will ensure the fees are entered in the tax code.
7) Employment Expenses
First the legal jargon. If an employee incurs expenses that are ‘wholly, exclusively and necessarily’ incurred in the performance of the duties of the employment, they are tax free.
There are many tax free expenses that an employee can. Such a claim can be made direct to the employer, for expenses such as mileage claims, travel and subsistence claims and entertaining. The claims to the employer will normally be made through an expenses system that is in place and the payments are reimbursed.
However, if such payments are not reimbursed what can you do? HMRC allow an ‘Overpayment Relief Claim’ that can cover 4 closed tax years. Although such a claim will not provide for the full reimbursement of the expenses through the tax system, HMRC will allow tax relief on the expenses and refund that direct directly to the employee.
One such expense is mileage. HMRC allow a tax free payment of 45 pence for the first 10000 business miles, and 25 pence thereafter. However many employers do not pay the 45 pence. If the employer only pays, for example, 25 pence per mile, tax relief will be available on the remaining 20 pence.
This may not sound a lot, however if a large amount of mileage is undertaken, the amount of tax relief can soon add up, especially over 4 years.
8) Mobile Telephones
A strange inclusion in a tax saving article for employees, you may think. However are the employer and employee aware that there are no tax consequences if the employer provided a mobile telephone for the employees use?
This can be used as an incentive for the employee. However a word of caution, the employer must be the subscriber and pay the bill. The potential savings can run into many £100’s.
9) Working from home
If an employee works from home on a regular basis, they may be able to claim for payments that are associated with the work, such as business telephone calls or the additional cost of gas or electric.
However a claim cannot be made for things that the employee uses for both business and private use such as broadband access.
HMRC will allow a claim of up to £4 per week without the need for any records to be provided. Any claim over £4 will need evidence of the expenditure.
10) Uniforms, work clothing and tools
Employees may be able to claim tax relief on money spent on tools or specialist clothing required to perform their duties. A claim can cover the cost of repairing or replacing small tools required to do the job, or cleaning, repairing or replacing specialist clothing such as uniforms.
However a claim cannot be made to buy equipment to use in the job, only replacements.
A claim can be made for either:
- The amount spent (receipts will be required)
- A flat rate deduction
Flat rate deductions are set amounts that HMRC has agreed that are typically spent each year by employees in different occupations. HMRC produce an annual list of the occupations and the amounts that can be claimed.
If the occupation is not listed then the employee may still be able to claim a standard annual amount of £60. Receipts do not need to be retained if a flat rate claim is made.
As with most expenses, HMRC allow claims to be back dated for 4 years.