Year-end tax planning for employers and employees
17 Feb 2023
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.
The amount of tax deducted from an employee’s salary depends on their Pay As You Earn (PAYE) code. This code is issued by HM Revenue & Customs (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.
As mentioned in the individuals section, those making over £100,000 are subject to a clawback of their personal allowance. Special care should be taken when reviewing tax codes to ensure the personal allowance clawback has been adequately considered.
If you are both employed and self-employed, or have more than one employment, you may be paying excess National Insurance contributions (NICs). You can defer the excess NICs, and should normally apply by 5 April 2023 for deferment in 2023-24. If NICs have been overpaid, then you will need to apply to HMRC for this to be refunded.
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 Real Time Information and Making Tax Digital programmes have meant that HMRC is making more use of data reported by employers to adjust tax codes in-year. Carefully check new notices and HMRC’s underpinning estimates of your total income 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.
- If you have to work from home (as opposed to choosing to work from home) then you may be eligible for working from home allowance. If your employer does not pay this, you may be able to claim it directly from HMRC.
Top tips for employers
- The latest date for filing the last Full Payment Submission (FPS)/Employer Payment Summary (EPS) for 2022-23 is 19 April 2023. Outstanding payments of PAYE and Class 1 NICs must be made by 22 April (assuming payment is by electronic transfer).
- Reports in respect of relevant employee share schemes need to be made online by 6 July 2023.
- 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 2023 for anyone wishing to move to payrolling in 2023-24).
- Any benefits provided under salary sacrifice or other optional remuneration arrangements that employers have not opted to payroll for the 2022-23 tax year must be reported on P11Ds by 6 July 2023. Where benefits are payrolled, the P11D(b) must also be completed by this date.
- Consider whether any employees enrolled in a ‘Cycle to Work’ scheme still meet the qualifying conditions for the scheme if they are now wholly or majorly working from home.
- Where entities are part of a group of companies, check that employment allowance has been claimed correctly and the right amount of apprenticeship levy has been paid.
The planned introduction of the Health and Social Care Levy (HSCL) will now no longer go ahead as planned from 6 April 2023. The rates of NIC will therefore remain the same as they were in 2022-23 before the introduction of the 1.25% increase for the HSCL.
The employer NIC threshold (currently £9,100 a year) will now be frozen until April 2028.
If calendar year-end bonuses are payable before the end of March 2023 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. It may be possible, if the allowance has only been exceeded in the current year (not in any of the three previous tax years), then any unutilised allowance from the three prior tax years can be used in 2022-23.
- 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 £25,300 in 2022-23, making the tax cost £3,744 if you are a higher rate (40%) taxpayer driving a company car attracting the maximum percentage. If you are a 45% taxpayer in 2022-23, the maximum fuel benefit will result in a tax cost of £4,212. If you have not driven many private miles, then you may wish to look at repaying the cost of private fuel to your employer if the tax cost is higher than the fuel cost used in the year.
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 £3,600 for 2022-23, plus £688 if free fuel is provided for private journeys. Zero emission vans are not subject to the van benefit charge.
If you use your own car (including electric vehicles) 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).
- 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 a new company 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 2022-23. There can be issues where a capital contribution is made towards a pre-existing or leased car, and you should take advice in this situation.
- 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.
The appropriate percentages for electric and ultra-low emission cars (those emitting less than 75g/km of CO2) will increase by 1% in 2025-26, with a further 1% increase in both 2026-27 and 2027-28. This will increase the percentages to 5% for electric cars and 21% for ultra-low emission cars in 2027-28.
The fuel cost benefit fixed amount will increase to £27,800 from 6 April 2023. This is nearly a 10% increase from the amount in 2022-23, which means employees and employers may wish to consider whether this remains a tax efficient benefit for them going forward.
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. There are some restrictions on salary sacrifice or salary exchange arrangements that do not involve pensions, low-emission cars or cycle to work schemes, so other tax-efficient benefits would need to be offered as well as, rather than instead of, current salary.
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 2022-23). While the rate for the 2022-23 tax year has yet to be formally announced, there is likely to be a significant increase from the current rate and this should be taken into consideration when looking at longer-term arrangements.
- 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.
You may also be interested in:
- Year-end tax planning for individuals.
- Year-end tax planning for business owners.
- Year-end tax planning for property owners.
- Year-end tax planning for overseas individuals.
- Year-end tax planning and tax efficient investments.
- Year-end tax planning and going digital.
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 February 2023. The FCA does not regulate tax advice.