Year-end tax planning for employers and employees

8 Feb 2022

Business people

We outline what employers and employees can do before the end of the UK tax year to make the most of the available allowances and reliefs open to them.

General planning

The amount of tax deducted from an employee’s salary depends on their Pay As You Earn (PAYE) code. This code is issued by HMRC and is based on the individual’s personal allowances, with appropriate adjustments for any benefits and deductible amounts, such as pension contributions. This information is increasingly being updated in real time, with tax codes changing in-year as employers and employees report changes – such as new benefits – to HMRC.

If you are both employed and self-employed, or have more than one employment, you may be paying excess NICs. You can defer the excess NICs, and should normally apply by 5 April 2022 for deferment in 2022-23.

Top tips for employees

  • Register for your online Personal Tax Account (PTA). This will allow you to view information on tax and NICs deducted from your salary, and your state pension entitlements. You can also use your PTA to update contact details and provide information on new benefits or other employment income.
  • The Making Tax Digital programme has meant that HMRC is making more use of data reported by employers to adjust tax codes in-year. Check new notices – and HMRC’s underpinning estimates of your total income – carefully to avoid making inadvertent over/under-payments.
  • Consider making a payment to your employer as a contribution towards benefits received, to reduce the tax charge. These payments must be made before the P11Ds are filed.

Top tips for employers

  • The latest date for filing the last Full Payment Submission (FPS)/Employer Payment Summary (EPS) for 2021-22 is 19 April 2022. Outstanding payments of PAYE and Class 1 NICs must be made by 22 April (assuming payment by electronic transfer).
  • Reports in respect of relevant employee share schemes need to be made online by 6 July 2022.
  • Payrolling benefits can offer administrative and cost savings, but employers need to have an agreement in place with HMRC before the start of the tax year (so by 5 April 2022 for anyone wishing to move to payrolling in 2022-23).
  • Any benefits provided under salary sacrifice or other optional remuneration arrangements that employers have not opted to payroll for the 2021-22 tax year must be reported on P11Ds at the end of the year.

Looking forward

From 6 April 2022, the government will introduce the Health and Social Care Levy, initially as a temporary increase in National Insurance rates. The levy will result in NIC increases of 1.25% for both employee and employer and will also apply to self-employed workers.

The main rate of employee NIC will therefore increase to 13.25% and then fall to 3.25% for earnings over £50,270. The employer NIC rate will be 15.05% and will apply equally to earnings, benefits in kind subject to Class 1A NIC and PAYE Settlement Agreements.

From April 2023, the Health and Social Care Levy will be separated from the main NIC rates into a separate levy in its own right. This will mean it will be payable by pension age employees. At this stage it is not clear whether this levy will be considered a tax or a social security charge – the classification will determine whether or not it needs to be paid by globally mobile workers.

Pensions

If calendar year end bonuses are payable before the end of March 2022 but have yet to be paid, employers could consider offering employees the opportunity to waive all or part of their bonus in favour of an increased employer pension contribution.

Correctly structured, the bonus waiver will not be liable to PAYE/NICs and there will be an employer’s NIC saving (which the employer may consider using further to enhance the pension contribution made). If the employee has exceeded their annual or lifetime pension allowance, any tax charge due on the pension contribution will be collected directly from them rather than being an employer reporting/withholding event.

Top tip

  • All employers must ensure that eligible employees are automatically enrolled into a workplace pension. Not all workers are required to be enrolled – so employers should monitor their payroll on a regular basis to ensure that all eligible employees are identified.

Cars and fuel

The taxable benefit of a company car is calculated by multiplying the list price by a percentage (up to a maximum of 37%) based on the car’s CO2 emissions levels.

There is an additional surcharge on diesel cars of 4%, to a maximum of 37% (diesel hybrids and diesels certified to the Real Driving Emissions 2 (RDE2) standard are exempt from this additional surcharge).

If your employer also provides you with free fuel for your company car, the tax charge is based on the car’s CO2 emissions. This will be the same percentage used to calculate the taxable car benefit and is applied to a fixed amount of £24,600 in 2021-22, making the tax cost £3,641 if you are a higher rate (40%) taxpayer driving a company car attracting the maximum percentage. If you are a 45% taxpayer in 2021-22, the maximum fuel benefit will result in a tax cost of £4,096. The provision of electricity to charge private employee vehicles at the workplace is exempt from being taxed as a benefit in kind.

If you are provided with a company van and use it for private journeys, the basic benefit on which tax is charged is £3,500 for 2021-22, plus £669 if free fuel is provided for private journeys. From 6 April 2021, zero emission vans are not subject to the van benefit charge.

If you use your own car for business purposes, you can be paid a tax-free mileage allowance provided it does not exceed the following limits:

  • 45p per mile for up to 10,000 business miles.
  • 25p per mile for each additional mile over 10,000.
  • 5p extra for each work passenger making the same trip.

If you use your own bicycle or motorcycle for business journeys, you can receive a tax-free mileage allowance of 20p per mile (bicycles) and 24p per mile (motorcycles).

Top tips

  • Consider switching to a company car with low CO2 emissions for significant tax savings, particularly if your current car is a diesel.
  • Consider making a capital contribution towards the cost of the car to reduce your taxable benefit. Contributions up to £5,000 qualify for relief: this would save tax of up to £833 if you are a 45% taxpayer during 2021-22.
  • Consider whether you are better off owning your car personally and claiming an allowance for your business mileage.
  • If you receive fuel benefit, work out the amount you would spend on private fuel and compare this to the tax cost of the benefit to ensure it is worth receiving the benefit. If you reimburse your employer the full cost of all fuel used for private journeys, there will be no benefit in kind tax charge for the fuel.
  • If you use your own car for business purposes and the rates at which your employer reimburses you are lower than the authorised rates, you can claim the difference as a deduction in your tax return.

Other benefits in kind

Some benefits have no tax or National Insurance cost, including work-related training, health screening, interest-free loans of up to £10,000 and small weekly contributions by your employer towards the cost of working from home.

Tax-free loans

Employers can provide employees with interest-free loans of up to £10,000 without a taxable benefit arising. If the loan balance exceeds £10,000 at any point in a tax year, tax is chargeable on the difference between the interest paid and the interest due at an official rate (2% for 2021-22).

Top tip

  • Where employers offer a range of benefits, employees should review their choices regularly, rather than defaulting to previous selections. Changes to the tax treatment of certain benefits – such as the increased benefit on diesel cars – could mean that a more attractive option is available.

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This article is published on a general basis for information only and no liability is accepted for errors of fact or opinion it may contain. Professional advice should always be obtained before applying the information to particular circumstances. Tax law is subject to change. This publication represents our understanding of the law and HM Revenue & Customs’ practice as at 1 January 2022. The FCA does not regulate tax advice.

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