Income and deductions

Produced by Tolley in association with Vince Ashall

The following Employment Tax guidance note Produced by Tolley in association with Vince Ashall provides comprehensive and up to date tax information covering:

  • Income and deductions
  • Taxable pay
  • Pension contributions
  • Payroll giving
  • Employee share schemes
  • Share incentive payments
  • Save as you earn (SAYE)
  • National insurance
  • Insurable pay
  • Deductions
  • More...

Income and deductions

Under PAYE, income from employment is subject to deductions of income tax and NIC in addition to other deductions. Income from employment includes basic pay, overtime, bonus payments, shift payments, regional payments such as London Weighting, tips, and gratuities. This list is not exhaustive. Also included as income is any incidental benefit of any kind obtained by the employee if it is money or money’s worth, or if the employer has registered for voluntary payroll of benefits. See the Non-cash earnings ― overview and Voluntary payrolling of benefits in kind guidance notes.

The total of the individual items of pay that make up employment income is normally called ‘gross pay’.

See Example 1.

Benefits in kind (BIK) are usually dealt with under the benefits code and, unless payrolled, are reported at year-end under the P11D procedures. See the Voluntary payrolling of benefits in kind and Year-end benefit reporting guidance notes.

Taxable pay

The value of gross pay as defined in the first paragraph above is normally the same value as taxable pay.

PAYE allows for certain deductions to be made from earnings to arrive at gross pay for PAYE purposes. These are:

  1. pension contributions

  2. payroll giving

  3. share incentive payments

  4. tax exempt benefits and expenses

Higher or additional rate taxpayers who pay pension contributions subject to the relief-at-source method will need to claim further tax relief due through their self assessment returns as relief at source is given at the basic rate.

Taxable payments that are not dealt with through the payroll are reflected in the employee’s tax code. See the Notices of coding guidance note.

Pension contributions

Allowable pension contributions are those made to aregistered occupational pension scheme that operates the net pay arrangement. Under this arrangement, the pension contributions are deducted from gross pay before the income tax calculation is made. Without registration with HMRC, apension scheme cannot benefit from the tax privileges given to registered pension schemes. For registered schemes, both the employee and employer can obtain tax

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