Tax Credits: Employment income
HMRC publish some information on the GOV.UK website and produce a worksheet TC825 to help with calculating deductions. See also pages 11-16 of the TC 600 guidance notes but please note that whilst it is still useful, HMRC have withdrew this publication in April 2019).
‘Employment income’ broadly follows employment income for tax purposes, so most employees can use the amounts given on their P60 or P45. However, there are a number of minor differences between the two, particularly in the treatment of benefits in kind.
Note: where employees are furloughed under the Coronavirus Job Retention Scheme, their employer may apply to HMRC for a grant to cover 80% of wages/salary for a period. Such earnings are subject to tax and national insurance in the usual way and should also be treated as normal earnings for tax credit purposes.
‘Employment income’ means:
- any earnings from an office or employment received in the tax year, including not only wages, salary and fees but also gratuities, tips and other benefits in money or money’s worth (see below);
- payments of taxable expenses or reimbursements (ITEPA 2003, section 62 or 72) e.g. travel expenses, reimbursement of professional subscriptions, etc;
- the cash equivalent of any taxable non-cash voucher, credit-token or cash voucher received by the claimant in the tax year(ITEPA 2003, section 87, 94 or 81);
- taxable termination payments (ITEPA 2003, Part 6, Chapter 3);
- taxable statutory sick pay (ITEPA 2003, section 660);
- any statutory maternity, paternity (ordinary or additional), statutory parental bereavement pay or adoption pay received in excess of £100 a week;
- any statutory shared parental leave pay received in excess of £100 a week;
- the cash equivalent of the benefit of a company car or car fuel (ITEPA 2003, section 120 or 149);
- the relevant amount in cases where a car is made available to the claimant or member of the claimant's family pursuant to an optional remuneration arrangement where the car's CO2 emissions figure exceeds 75g per kilometre;
- any payment to the claimant for agreeing to restrict their activities taxable under ITEPA 2003, section 225 (restrictive undertakings);
- strike pay paid in the year (even if non-taxable) to the claimant as a member of a trade union;
- employment-related share income (ITEPA 2003, Part 7);
- payments for work done while in custody.
Employment income does not include pension income.
Benefits in kind and similar payments
In calculating the value of a benefit to be included in employment income for tax credits, the higher of the following two figures is used: the monetary value of the benefit to the employee; or the cost to the employer of providing it (less any contribution by the employee).
Taxable benefits included in employment income are broadly the cash equivalent of company cars and fuel, taxable expenses payments and mileage allowances, cash and non-cash vouchers and credit tokens, and money's worth – broadly, anything that can readily be converted into cash.
Taxable benefits that are not counted are living accommodation, vans, beneficial loans, taxable sick pay, and scholarships.
Other payments and benefits that are disregarded for calculating income tax on income from employment are generally disregarded in assessing employment income for tax credits except, with effect from 6 April 2017, where the payment or benefit is provided pursuant to optional remuneration arrangements (for example under a salary sacrifice arrangement or paid in lieu of salary) and is neither a special case benefit nor an excluded benefit (ie the type of benefit that is not taxable).
Special case benefits are excluded from income tax by any of the following provisions in ITEPA :
(a) section 289A (exemption for paid or reimbursed expenses);
(b) section 289D (exemption for other benefits);
(c) section 308B (independent advice in respect of conversions and transfers of pension scheme benefits);
(d) section 312A (limited exemption for qualifying bonus payments);
(e) section 317 (subsidised meals);
(f) section 320C (recommended medical treatment); and
(g) section 323A (trivial benefits provided by employers).
Excluded Benefits are excluded from income tax by any of the following provisions in ITEPA:
(i) section 239 (payments and benefits connected with taxable cars and vans and exempt heavy goods vehicles);
(ii) section 244 (cycles and cyclist’s safety equipment);
(iii) section 266(2)(c) (non-cash voucher regarding entitlement to exemption under section 244);
(iv) section 270A (limited exemption for qualifying childcare vouchers);
(v) section 308 (exemption of contribution to registered pension scheme);
(vi) section 308A (exemption of contribution to overseas pension scheme);
(vii) section 309 (limited exemptions for statutory redundancy payments);
(viii) section 310 (counselling and other outplacement services);
(ix) section 311 (retraining courses);
(x) section 318 (childcare: exemption for employer-provided care); or
(xi) section 318A (childcare: limited exemption for other care); or
- it is a payment, or reimbursement of costs incurred by the claimant, in respect of pension advice and that payment or reimbursement is exempt from a charge to income tax under Chapter 9 of Part 4 of ITEPA.
The disregarded benefits are:
- the payment or reimbursement of removal expenses, or any qualifying removal benefit;
- provision of transport for a disabled employee if not taxable under ITEPA 2003, section 246;
- provision of a car, fuel or the reimbursement of mileage expenses to a disabled employee if exempt from income tax under ITEPA 2003, section 247;
- the payment or reimbursement of travel expenses between home and work for late-working employees and where car-sharing arrangements fail, to the extent such payments are allowable against income tax under ITEPA 2003, section 248;
- travel facilities for members of the armed forces going on or returning from leave;
- operational allowances and council tax relief payments to members of the armed forces (ITEPA 2003, sections 297A and 297B);
- Continuity of Education Allowance for members of the armed forces;
- any accommodation allowance which is payable out of public revenue for, or towards, the costs of accommodation to, or in respect of, a member of the armed forces of the Crown, providing that the payment meets any conditions which have been specified in regulations made by the Treasury;
- car parking facilities or reimbursement of parking costs at work;
- the provision of recreational facilities, annual staff parties or third party entertainment, and non-cash vouchers exchangeable for such benefits, exempt from income tax under ITEPA 2003, part 4, Chapter 5.
- the payment or reimbursement of incidental overnight expenses exempt from income tax under ITEPA 2003, section 240;
- food, drink and mess allowances payable to members of the armed forces and training allowances for members of the reserve forces exempt from income tax under ITEPA 2003, sections 297 and 298;
- luncheon vouchers to a value of up to 15p a day exempt under ITEPA 2003, section 89;
- free coal or smokeless fuel given to miners, or a cash payment in lieu, exempt tax under ITEPA 2003, section 306;
- long-service awards exempt under ITEPA 2003, section 323;
- daily subsistence allowances payable by the European Commission to those seconded to it under the detached national experts scheme (ITEPA 2003, section 304);
- transfer transport and related accommodation and subsistence payable to offshore oil and gas workers exempt tax under ITEPA 2003, section 305;
- foreign service allowances paid to Crown employees and exempt tax under ITEPA 2003, section 299;
- payment or reimbursement of any sum, or the provision of credit-tokens or non-cash vouchers, in connection with work-related training and individual learning account as defined by ITEPA 2003, section 251 and 256 respectively;
- tax-exempt non-cash vouchers and credit-tokens (ITEPA 2003, Part 4, Chapter 6);
- free or subsidised meal vouchers or tokens exempt tax under ITEPA 2003, section 317;
- the provision of one mobile telephone for an employee (ITEPA 2003, section 319);
- staff suggestion awards, provided the conditions in ITEPA 2003, section 321 and 322 are satisfied;
- travelling and subsistence allowances paid to an employee during public transport strikes, exempt from income tax under ITEPA 2003, section 245;
- small gifts from third parties, including vouchers and tokens, exempt from income tax under ITEPA 2003, sections 270 or 324;
- incidental expenses of employment-related asset transfers exempt from income tax under ITEPA 2003, section 326;
- reimbursement of expenses or discharge of a liability incurred by the employee on a taxable car or van or an exempt heavy goods vehicle, if exempt tax under ITEPA 2003, section 239(1) or (2);
- a benefit in connection with a taxable car if no income tax liability arises by virtue of ITEPA 2003, section 239(4);
- childcare vouchers or credit tokens which would have qualified as relevant childcare charges for the purposes of the WTC childcare element if the cost of the childcare had instead been borne by the recipient of the voucher or token;
- a payment by the DWP under Employment Act, section 2, of
- in-work credit, better off in-work credit, job grant or return to work credit, or
- under the Employment Retention and Advancement Scheme or the Working Neighbourhoods Pilot, or
- under the City Strategy Pathfinder Pilots, or
- by way of an In-Work Emergency Discretion Fund payment or an Up-front Childcare Fund Payment, or
- under the Future Capital Pilot Scheme;
- payment or reimbursement by an employer of a homeworker’s reasonable additional household expenses exempt under ITEPA 2003, section 316A;
- the payment or reimbursement of retraining course expenses within ITEPA 2003, section 311;
- provision of computer equipment to the extent that it is exempt from income tax under ITEPA 2003, section 320, where the computer equipment was first made available to the employee or member of his household before 6 April 2006;
- PAYE settlement agreements under the Income Tax (PAYE) Regulations 2003 (SI 2003/2682), Part 6;
- The payment or reimbursement of a fee within section 326A(1)ITEPA (fees relating to vulnerable persons’ monitoring schemes;
- A qualifying bonus payment to the extent that it is exempt from tax under 312A ITEPA (limited exemption for qualifying bonus payments).
At the end of each tax year, claimants who have received benefits in kind should receive a P11d or P9d from their employer listing the value of the benefits they have received. The TC600 guidance notes (page 14) instruct claimants to gather various figures from boxes on the P11d/P9d when working out their total income.
The normal process of paying tax on benefits in kind involves HMRC adjusting a person’s tax code in the following year to recover the tax owed on those benefits. However, there are a small number of employers who tax benefits in kind by including them in weekly or monthly pay. Although they still issue a P11d/P9d at the end of the year, it means that when a claimant receives their P60 or P45, the total income figure will include some benefits in kind.
Prior to April 2012, tax credits guidance notes were silent on what to do in this situation. From April 2012, HMRC instruct claimants to deduct the benefits in kind figure from their P60/P45 income before entering it into the relevant box on the tax credits claim form or renewals form. They should then enter the figure relating to the benefits in kind (from their P11d/P9d) into the relevant box. This avoids double counting of the benefits in kind.
Deductions from employment income
The following tax-deductible items are also deducted from employment income for tax credits:
- mileage allowance relief for an employee who uses his/her own car on business but whose employer reimburses less than an approved amount (ITEPA 2003, section 231);
- expenses incurred “wholly, exclusively and necessarily” in the course of employment (ITEPA 2003, section 336);
- travel expenses (ITEPA 2003, sections 337 to 342);
- professional membership fees and subscriptions (ITEPA 2003, sections 343 and 344);
- payments in discharge of employee liabilities and premiums for indemnity insurance (ITEPA 2003, sections 346, 347);
- expenses of ministers of religion (ITEPA 2003, section 351);
- agency fees paid by entertainers (ITEPA 2003, section 352);
- non-cash vouchers and credit-tokens exchanged for goods or services which would have been a deductible expense if the cost had been incurred by the employee (ITEPA 2003, sections 362 and 363);
- fixed sum deductions for repairing and maintaining work equipment (ITEPA 2003, section 367);
- fixed sum deductions from earnings payable out of public revenue (ITEPA 2003, section 368);
- travel costs and expenses where duties performed abroad, including those incurred by visiting spouses, civil partners or children of the employee (ITEPA 2003, sections 370 and 371);
- travel costs and expenses for a non UK domiciled employee performing duties in the UK, including any incurred by the non-domiciled employee’s spouse, civil partner of child (ITEPA 2003, sections 373 and 374);
- foreign accommodation and subsistence costs and expenses for overseas employments (ITEPA 2003, section 376);
- costs and expenses in respect of personal security assets and services (ITEPA 2003, section 377);
- payroll deductions (ITEPA 2003, section 713).
'Deemed payments' under the IR35 rules for income tax are not included in employment income. The IR35 rules come into play if you are an employee of your own company, and have to pay tax not only on the dividends and salary you receive from the company, but also on the payments your clients make to your company.
Share Incentive Plans (SIPS)
There is no deduction from earnings for any amount of pay that the claimant saves into a Share Incentive Plan (SIP).
Where a person who participates in a SIP exits the plan within 3 years, not for reasons of ill-health, incapacity or redundancy, they must declare the market value of their shares as employment income (under Part 7 ITEPA). This means that for tax credit purposes, not only do they not receive any deduction from income for any contributions they make to the scheme, but if they leave the scheme early, they also have to include the market value of the shares they have acquired as employment income. This is the case even though the money they used to buy those shares has already been declared.
A person earns £15000 gross per annum and pays £50 gross per month into their SIP, they declare their employment income as £15000 for tax credit purposes as no deduction for the SIP is permitted in tax credits.
The SIP builds to acquire shares to the value of £1200 (£50 per month for 2 years) before the person exits the SIP within 3 years. On leaving the SIP, the shares are transferred to the person and the £1200 is subject to tax under Part 7 ITEPA and they must declare the same money again for the tax credits claim. So their income in the year they leave the scheme will be increased by £1200.
More information about SIPs and the impact on benefits can be found in HMRC’s leaflet IR177 - Share Incentive Plans and Your Entitlement to Benefits.
Last reviewed/updated 12 July 2021