Tax Return – Calculating Your UK Income Tax

A Guide To Direct And Indirect Taxation In The UK – How To Save Money
Chapter Four

Story Highlights:

Continuing our informative guide to taxes in the UK, this chapter takes an in-depth look at:

  • Income tax returns – who files tax returns in the UK, deadlines for submitting then to HMRC and what to do if they contain errors
  • Emails supposedly from the Tax Office
  • Tax rebates/relief for salaried employees
  • How to claim for work-related expenses
  • Tax-free employee fringe benefits
  • Taxable fringe benefits – bonuses, commission and tips
  • Employee perks – a company car and childcare support
  • How taxes are calculated on benefits in kind

Understanding your tax return and income tax

In the beginning of this chapter, we look at tax returns and by whom and when they have to be submitted and what to do if you make a mistake on your tax return.

The rest of the chapter is all about how taxes affect salaried employees. We explain which work-related expenses allow you to claim tax relief and how to do this. We then turn our attention to the question of benefits in kind you may receive from your boss. Whether it’s a company car or a works canteen, we explain which perks are tax-free, which are taxable and how this is calculated and paid.

What is a tax return?

A tax return is a paper or online form on which you report any details of taxable income or any capital gains. It’s also necessary to complete a tax return if you wish to claim a tax allowance or tax relief/rebate.

It’s necessary to complete a tax return if you wish to claim a tax allowance, tax relief or tax rebate.

Who files a tax return in the UK?

For the vast majority of people with one source of income on the PAYE system (which is 85% of taxpayers), filing a tax return is completely unnecessary since deductions are made automatically every month by their employer. The new system of reports being made in Real Time (since April 2013) has made it even easier for the Tax Office to react to changes in taxpayers’ circumstances. So who needs to file a tax return in the UK?

You will receive a tax return if you’re:

  • Self-employed
  • A company director
  • Renting or receiving income from property
  • If you receive other income which can’t be taxed through the PAYE system

If you aren’t sent a tax return but feel that you should file one, it’s your responsibility to inform HMRC. This should be done by 6th October following the end of the tax year when the income first arose or your circumstances changed.

An HMRC form that can be used for the purposes of UK income tax, tax returns, tax relief and fringe benefits

If you receive a tax return and feel that your circumstances are such that you don’t need to complete it, don’t just ignore it. There are penalties for not filing a tax return in time and there could be financial consequences for you. What you should do is contact HMRC (by phone: 0300 200 3300) and query whether the return should be filled in or whether they’ve sent it to you by mistake.

Tax return deadline – When must a tax return be submitted?

Paper tax returns must be sent by 31st October whilst online tax returns must be sent by 31st January following the end of the tax year. There are strict penalties for not meeting these deadlines and these increase according to how late you are. You will need to pay this fine even if you don’t owe any tax or if you’re owed a rebate.

One thing to be careful of when you are submitting your tax return online is not to leave it until the very last minute. To submit the return online, you need a Personal Identification number and once you register at the government website, it takes 7 days for this number to be issued.

Although you might be waiting for key financial information in order to complete your tax return, this isn’t considered a reason to delay in sending it. Instead, you should use provisional figures and draw attention to the fact that they aren’t the final figures. Minor amendments or rectifications can be made later by phone.

Errors in tax returns

If you overestimate your income, the extra income tax you’ve paid will be repaid with interest. However, a significant error involving under-declared income could be grounds for an enquiry. If after investigation, HMRC feel that you were guilty of negligence or fraud, then you could be liable to a hefty fine as well as the interest owed on your late tax payment.

Summary:

A tax return is completed if you don’t pay tax through the PAYE system or if you wish to claim tax allowance or relief/rebate.

If you receive a tax return, you should fill it in even if you think it doesn’t apply to you but could check with the HMRC first.

The deadlines for tax returns are October 31st (by paper) or January 31st (online submissions) and you can be penalised for delays.

You can use provisional figures and minor errors can be corrected by phone.

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Tax rebate or tax refund in the UK

You may be entitled to a tax refund or rebate in a number of circumstances. It could be because you were employed and paid too much tax or you might have stopped work. You might be eligible for a refund if you were sent a tax return and paid too much income tax. To report an over- or under-payment of income tax, you’ll need to complete the P800 form.

You might be eligible for a refund if you paid too much income tax

Another common reason for receiving tax relief is if you used your own money to pay work-related expenses. These expenses vary according to which job you do but the most common reasons are for fuel costs or for uniforms, work clothing and tools.

Emails from the tax office – A warning!

Before we explain tax rebates in more detail, you should bear in mind that HMRC never requests personal information by email. If you receive an email pretending to be from the Tax Office and requesting your personal details or bank codes in order to repay a tax refund or it’s a threatening email urgently demanding back taxes to be paid into a bank account, it is a most definitely a fake – either to defraud you or to use your details to commit identity fraud. What you should do is to report the email to HMRC so that it can be investigated to prevent people becoming victims of such tricksters.

Questions:

Do I need to complete a tax return?

For most people with a single source of income, filing a tax return is unnecessary since deductions are made automatically every month.

When are tax returns due?

Online tax returns must be submitted by 31st January following the end of the tax year while paper tax returns must be submitted by 31st October.

How can I calculate my income tax?

You may estimate your income tax for the current year by using the official UK government service.

Do tax rebates happen automatically?

You may be entitled to a refund if you were sent a tax return and overpaid your income tax. To report an incorrect payment of income tax, you need to complete the P800 form.

Tax rebate for salaried employees

Did you know that you could claim tax relief when you use your own money for work-related travel or for things you purchase which you need for your job?

You can only claim for things you use exclusively for work but not if they’re also used in your private life. Also, you aren’t entitled to tax relief if your employer has provided an alternative. In order to claim, it’s vital that you keep records of what you’ve spent in the form of receipts.

In the following section, we will consider tax relief for: uniforms, work clothing and tools; claims for business mileage and fuel; work-related travel and overnight expenses; professional subscriptions and fees; home-based workers and finally voluntarily working from home.

Claim expenses on uniforms, work clothing and tools

Although you can’t claim on the initial cost of buying specialised clothing or equipment for work, you can claim on the cost of repairing or replacing small tools and the expenses related to the cleaning, repairing and replacing of specialist clothing such as a uniform or safety boots.

There are 2 ways of claiming. You could apply to have deductions made according to how much you’ve spent (in which case you’d need to keep receipts). Alternatively, you could use a ‘flat rate deduction’ which are set amounts of money typically spent by employees in different professions and which means no receipts are required.

Questions:

Can I receive tax relief for my car?

If your vehicle is used only for work, then you can receive tax relief but if it’s also used as a family vehicle then you can’t receive any financial help from the Tax Office for its expenses such as the MOT and so on.

In what other circumstances can you get tax relief?

You can also get tax relief on pension contributions, donations to charities, maintenance payments and if you work on a ship outside the UK.

Can I receive tax relief for larger pieces of equipment?

Yes. If you need to purchase substantial pieces of equipment to do your work, you’re entitled to a capital allowance called an annual investment allowance. You should deduct the full value of the item from your profits before tax.

How much is the annual investment allowance in the UK?

For the 2017-18 tax year, the annual investment allowance is £200,000.

Summary:

You might be entitled to a tax rebate if your circumstances change during the tax year or you wish to claim for work-related expenses.

HMRC never arranges tax rebates or demands back taxes via email so if you receive one supposedly from them, report it immediately.

Salaried employees can claim tax relief on work-related expenses when they’re used exclusively for their job and aren’t supplied or reimbursed by their employer.

Expenses for specialised work clothing and small tools can be made according to the receipts or as a standard (average) deduction according to your profession.

Claims for business mileage and fuel

The amount of tax relief you’re entitled to depends on whether you’re using your own car or whether you have a company car. You can’t claim on expenses incurred commuting to your workplace unless your employer has required you go to a different workplace on a temporary basis. For example, you’re setting up a new office or you’re required to attend seminars/conferences.

A professional using their vehicle for work can claim mileage allowance relief, a form of tax relief

If you’re using your own vehicle, you can claim ‘Mileage Allowance Relief’. All you need to do is to calculate all your business mileage for the tax year and multiply it by the approved mileage rates. You should keep accurate records of the dates and mileage for work-related travel. If you aren’t reimbursed the full amount by your employer, then you can make a claim on the difference. You should bear in mind that if your employer gives you more than the approved rates, you must pay tax on the difference.

Do you perhaps use more than one vehicle for your job? If you use the same kind of vehicle, then the mileage and expenses can be combined. However, if you use different types of vehicle, then the amounts should be calculated separately.

If you have a company car, you should also keep records to prove the amount spent on fuel. If your employer reimburses some of your expenses, you can receive tax relief on the difference.

Travel and overnight expenses

Otherwise known as subsistence, you could also be entitled to tax relief if your profession requires you to travel overnight away from home and your additional expenses aren’t fully covered by your employer. These expenses include money paid on: public transport, hotel accommodation, food/drink, congestion charges, parking fees, business phone calls and any charges for work-related photocopying or faxes.

You could be entitled to tax relief if your profession requires you to travel overnight away from home and your additional expenses aren’t fully covered by your employer.

Tax relief on professional subscriptions and fees

If you either have to be a member of a professional organisation as a condition to practising your chosen job or if membership helps you with your work, then you can receive tax relief on the fees. If you aren’t sure whether this applies to you, you can check with your professional association or check the list of approved professional organisations on the government website.

You won’t be entitled to tax relief for life membership fees or if your employer pays the fees on your behalf.

Tax rebate for working from home

In certain jobs, you might work from home. In this situation, you’re entitled to claim for work-related expenses such as business phone calls. However, you aren’t entitled to have tax relief for expenses which are part of your private expenditure like the rent or payment for broadband access. For claims up to £4 a week (or £18 a month), no proof is required but for claims which exceed this amount, then you must provide evidence.

Voluntarily working from home

Technology has meant that increasingly employees are allowed to work from home, often on a part-time basis such as certain days in the week. Although you won’t pay tax or National Insurance contributions on the amount you get from your employer, you can’t get tax relief unless your employer makes a contribution.

Also On Family Money…
In our article about understanding UK income tax you can find out about the PAYE tax system, your tax code and tax bands in the UK. Read our article to better understand PAYE tax and your tax code

Summary:

You can receive tax relief on business mileage whether you drive your own vehicle or have the use of a company car although you aren’t covered for the costs of commuting.

A subsistence allowance covers you for work-related expenses if you make overnight trips for your job.

If you must be a member of a professional organisation for your job and your employer doesn’t pay, you can claim tax relief.

There are difference rules for tax relief for home-based workers depending on your circumstances and what you wish to claim for.

Self assessment tax return – Claim expenses

How you claim for work-related expenses depends on the amount and whether it’s over £2,500 or not.

For amounts up to £2,500 you can fill in the form P87 online or you can print it off and send it by post. Claims can also be made by phone if you have claimed in a previous tax year, if it’s less than £1,000 or a maximum of £2,500 for subscription or professional fees. You’ll receive the tax relief in the form of adjustments to your tax code.

For expenses over £2,500 you must use a Self-Assessment tax return. You will then be sent a tax code and HMRC will check your tax return in the light of any claims you’ve made in previous years.

Job perks for salaried employees – taxable or not?

Some salaried employees are given a number of work-related perks but there’s often confusion about which ones are liable for tax and which ones are tax-free. Some employees are under the misconception that non-cash benefits in kind aren’t taxable. Let’s consider the most common fringe benefits to see which are taxable and which are tax-free.

Any cash benefits are treated as part of your normal wages

What are tax-free employee fringe benefits?

Tax-free employee perks include in-house canteen and sports facilities, hot drinks or water which are made freely available in the workplace, the provision of a mobile phone for work purposes, genuine personal gifts, occupational or personal pension schemes and special equipment to allow a disabled employee to do their job.

The provision of a works bus for the use of employees and any expenses incurred by the employer for the workers to commute by bicycle are similarly treated as tax-free by HMRC.

Questions:

Is medical insurance provided by my employer tax-free?

You will generally pay tax on the cost of the insurance premiums paid by your employer. The exceptions are the cost of medical insurance whilst you’re working abroad and the cost of annual medical check-ups.

If I’m reimbursed by my employer because I have to relocate, are the expenses taxable?

As long as you’re given reasonable removal expenses – up to £8,000 – then this sum of money isn’t taxed by HMRC.

If I receive a loan from my employer, should this be declared as taxable income?

You only pay tax on low-interest or interest-free loans from your employer if it’s over £10,000. The tax you pay will be on the difference between the interest rate you pay compared to the official interest rate set by the Bank of England.

Is living accommodation provided by my employer taxable?

You’ll be taxed on accommodation provided by your employer if you’re living rent-free or are paying below the market rent and the taxable amount depends if the property is worth more than £75,000. The exception is if the accommodation allows you to do your job better. For example, if you’re an agricultural worker living on a farm.

Taxable fringe benefits – bonuses, commission and tips

Any cash benefits such as bonuses and commission are treated as part of your normal wages so income tax and National Insurance are paid on them through PAYE. Do you work in a service industry and receive tips from customers? In this situation, you might be surprised to learn you must pay tax on them (although not N.I) but it’s your responsibility to let HMRC know so that you can be given a new tax code according to an estimation of how much you get.

Employee perks – A company car

You pay tax on a company car if it’s also used privately even if it’s only for commuting purposes. The tax depends on the value of the car to you – how much it would cost to buy and the type of fuel it uses. You’re entitled to a discount if you have it part-time, you pay something towards its cost or it has low CO2 emissions. If your employer pays the fuel for your personal journeys, this will be taxed separately.

You should inform HMRC immediately if the car or the fuel details change so that your tax code can be updated. Similarly, they should be told if you stop/start using a company car or your employer stops/starts paying for fuel.

Childcare vouchers and tax-free childcare

Tax must be paid for childcare paid for by your employer

The question of financial support for childcare is problematic in that whether you pay tax on it depends on the type of help you receive. If you are given childcare vouchers, use a workplace nursery or if your employer makes the childcare arrangements (otherwise known as ‘directly contracted childcare’), then the amount isn’t taxed.

However, you will be liable to both tax and National Insurance if your employer gives you cash to cover your childcare costs or if your childcare provider’s or school fees are paid directly by your boss.

Calculating taxes on employee perks

Apart from company cars (which have slightly different rules) taxable fringe benefits are taxed according to their ‘taxable value’ or ‘cash equivalent value’. In other words, the amount it cost your employer to provide you with this specific perk.

At the end of the tax year, your employer will tell you which perks they’ve told HMRC about or give you a copy of the P11D form sent to the Tax Office. You should keep records of these benefits for 2 years after the end of the tax year.


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