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Fixed deductions for expenses

Fixed deductions for expensesIntroductionIn certain circumstances, HMRC can agree an appropriate fixed rate amount (also called a flat rate expense) which can be deducted from earnings for tax purposes. These typically refer to certain classes of employees who are required to incur expenditure on things such as tools and clothing.For example, firefighters are entitled to a flat-rate allowance on the costs of cleaning and maintaining their uniforms where laundry services are not provided by their employers.These amounts should not be confused with round sum allowances which are discussed in the Round sum allowances guidance note which are generally treated as taxable income for the employee.Fixed deductions do not include the approved mileage rate for business travel using the employee’s own car. This is treated as business travel, see the Fuel-related payments / mileage payments guidance note.Fixed rate deductionsHMRC can agree fixed sum deductions that are negotiated with trade unions to apply to certain classes of employees. These are rates that employers may pay free of PAYE and reporting requirements, or that an employee may claim as a deduction where the expense is not reimbursed by the employer. These fixed rates are generally agreed in instances where it is burdensome for an employer or employee to administer expenses and the associated record keeping, eg where they have particularly large numbers of small payments. The fixed rate deduction covers the repair and replacement of clothes and equipment of certain classes of employees in certain types of industries. The full list of

Holiday pay

Holiday payIntroductionAs with any other cash payments to an employee, holiday pay should be included in payroll, and is subject to tax and Class 1 NIC. The key consideration is the timing of the payment to the employee and the impact that this has on the timing of the deduction of tax and NIC. Guidance on this subject is in HMRC’s CWG2 section 2.7.4.For employment law implications relating to holiday pay, please see the Holiday pay guidance note. For more on tax on holiday, see Simon’s Taxes E4.1113 and for NIC, see Simon’s Taxes E8.257. HMRC guidance starts at NIM09100.Normal payment timesIf an employer continues to pay the employee at the usual time, then the employer should continue to deduct PAYE and Class 1 NIC in the normal way.See Example 1.Payment in advanceIf the employer pays a weekly-paid employee in advance of a period of holiday, the PAYE procedures depend on whether the employee is on a cumulative tax code or a Week 1 tax code. See Example 2.The same principles apply to monthly-paid staff, but it is much more usual for monthly paid staff to be paid holiday pay at the normal payment time.Cumulative tax codeIf the employee is on a cumulative tax code, calculate and record tax to be deducted under PAYE as if the payment was being made on the payday for the last week of the holiday period.Typically, this will happen where individuals are paid weekly and have worked for a sufficient period of time

Setting up a payroll

Setting up a payrollIt may be stating the obvious, but to be an employer signifies that there are employees (or at least one employee). Depending on the employee(s) earnings, the employer may have to make certain statutory deductions from salaries and wages. Statutory deductions include income tax, national insurance contributions (NIC), student loan deductions (SLD) and attachment of earnings orders (AEO). These statutory deductions are all made via the payroll. The collection system for tax and NIC is called pay as you earn (PAYE).Registering with HMRCEven though there may only be one employee, an employer needs to register with HMRC if the employee(s):•has another job•is receiving a pension (state or occupational)•has earnings equal to or more than the lower earnings limit (LEL) for national insurance•is receiving benefits in kind from the employerRegistration needs to be undertaken before the first payday. The registration process can take up to 30 days and registration cannot be made more than two months before employees are first paid. The timescale for registering should also take account of the time constraints associated with registering for PAYE Online (see below).Registration can normally be done online following the Gov.UK guidance at ‘Register as an employer’. The information needed for registration is detailed in checklist 1 in Checklist ― setting up a payroll.Partnerships and limited companies need to supply further information, as do other types of organisations under certain circumstances. This additional information and the specific circumstances for other organisations can be found integrated

Patent box ― relevant IP losses

Patent box ― relevant IP lossesCalculating relevant IP lossesA patent box election is usually given effect by allowing a deduction to be made in calculating the profits of the trade for corporation tax purposes. See the Patent box tax regime ― overview guidance note for details. However, it is possible that the result of the calculations performed in arriving at the relevant IP profits is negative. This figure is known as a relevant IP loss. In these circumstances, there are no profits from which the deduction can be made to give effect to the reduced patent box rate of corporation tax. A company which has not already elected into the patent box regime is unlikely to make such an election for the first time during a loss making period. This is because the losses can only be relieved in a certain way (see below), which is more restrictive than other types of losses, such as trading losses. For example, a standalone company will only be able to relieve the patent box losses against patent box profits, thereby obtaining relief for the losses at a reduced rate of corporation tax, rather than at the main rate.However, a company may have already elected into the patent box regime when it subsequently becomes loss making. The company will be able to relieve any actual trading losses, as if it had not made an election into the patent box. However, it must still compute the amount of the relevant IP loss because this

Real time information

Real time informationReal time information (RTI) is the method by which employers communicate employees’ earnings and PAYE deductions to HMRC, unless an exemption from electronic filing can be claimed. See HMRC’s ‘Find out which employers are exempt from online payroll reporting’ and ‘PAYE21095 Employer Segmentation’ guidance which confirms that the exemption applies to:•care and support employers (where care is provided at or from the employer’s home)•employers that are ‘digitally excluded’, for example broadband coverage is poor or the employer is unable to file online because of their age (60+), or•the employer has a religious exemption from online filing because their beliefs are incompatible with the use of electronic communicationsHMRC will also consider some employers who have ‘exceptional circumstances’, for example a disability. However, in all instances where an employer wants to claim an exemption from online filing, this has to be approved by HMRC as it is not given automatically. Employers need to ring the New Employer Helpline (0300 200 3211) in order to obtain the paper forms necessary for paper filing.The term ‘employers’ in the RTI context also includes payrolls that pay occupational pensions. Thus, employers who pay their own pensioners (possibly via a specific pensioners’ payroll) need to comply with the RTI regulations, as does the Department of Work and Pensions (DWP).Similarly, in the RTI context, ‘employees’ includes pensioners. This includes pensioners paid by their ex-employers, pensioners paid by financial institutions such as insurance companies on behalf of the ex-employers and pensioners in receipt

Setting up overseas ― branch or subsidiary

Setting up overseas ― branch or subsidiaryAlthough a UK company can do a reasonable amount of business in another country without a taxable presence in that country, eventually the company may need to consider whether to establish a more formal presence in such a country, generally by way of a branch or subsidiary.The decision will often usually depend on commercial factors, particularly where there are regulatory requirements which demand, for example, a particular level of capital which is more easily satisfied through a branch structure where the parent company capital is taken into account.Where there is no particular commercial pressure for one legal form over another, tax issues may influence the decision by taking into account the local country’s tax position for branches and subsidiaries. For example, the parent company should consider:•is there any difference in tax rates between a branch and a subsidiary?•can profits be remitted back from the country to the UK in the same way? For example, the US has a branch profits withholding tax which is reduced to 5% in the UK / US tax treaty, but dividends paid from a US subsidiary to a UK parent company owning more than 80% of the share capital in the subsidiary for more than a year before the dividend is paid would not suffer any US withholding tax on the profits distributed by the subsidiary (see DT19867A)•can start-up losses in the entity be easily relieved against group profits?It is important to consider the classification

Payroll for pension schemes

Payroll for pension schemesIntroductionIn general terms, running payroll for pension schemes is no different than running PAYE for employees. Pensions are treated as income for PAYE and so pensioners are issued with a tax code (see the PAYE notices of coding guidance note) and tax is deducted accordingly.The major difference between a ‘pensioner payroll’ and an ‘employee payroll’ is that no NIC is due on pensions (this is on the assumption that the pension is being paid from a pension scheme registered with HMRC).Deductions from pensionsApart from NICs, other deductions, with one further exception, can be made from pension payments in the same way as they are taken from earnings.Attachment of earnings orders (AEO)Pensions are treated as earnings for AEO purposes. Thus, AEO may be received in respect of pensioners.Voluntary deductionsThe pension payer needs authorisation from the pensioner in order to take voluntary deductions from the pension, see the Income and deductions guidance note.Student / postgraduate loansThe calculation for a student loan deduction (SLD) / postgraduate loan deduction (PGLD) is based on the earnings that are used to determine the amount of Class 1 NIC due (see the Student and postgraduate loan deductions guidance note).As a pension is not earnings for Class 1 NIC purposes, no SLD / PGLD can be made from a pension payment.Real time information (RTI)Pension payers have to make returns to HMRC under the RTI process in the same manner as employers. This means submitting a full payment submission (FPS) on or before payday. See

PAYE obligations

PAYE obligationsSTOP PRESS: The remittance basis is to be abolished from 6 April 2025, although this only applies to foreign income and gains arising on or after that date. The remittance basis rules still apply to unremitted income and gains arising before that date but remitted later. The legislation is included in Finance Bill 2025. For more details, see the Abolition of the remittance basis from 2025/26 guidance note.Coming to work in the UKAn employee is subject to income tax if he is resident or carrying out employment duties in the UK. Just one day of work in the UK can result in a UK tax liability for the individual. It can also result in pay as you earn (PAYE) obligations for the employer. See the Setting up a payroll and Employees starting and leaving ― payroll consequences guidance notes.PAYE obligationsUnder normal procedures an employer is required to consider the status of any individual performing work on their behalf. See the Employment status ― why it matters guidance note. Payments to employees are required to be made under the PAYE regulations. However, registration is not required for an employer PAYE scheme if all employees are paid below the national insurance threshold (lower earnings limit) and do not have another job. Under real time information (RTI) reporting, an employer is required to operate PAYE, where at least one employee is earning at least the lower earnings limit, in which case all payments of earnings to all employees must be reported

PAYE Settlement Agreements (PSA) ― overview

PAYE Settlement Agreements (PSA) ― overviewA PAYE Settlement Agreement (PSA) is an agreement between the employer and HMRC not to declare certain benefits and expenses on employees’ P11Ds and for the employer to settle the tax and NIC instead. Why use a PSA?PSAs are popular with employers because they avoid the requirement to complete P11Ds for certain benefits and also mean the employee does not bear the tax and NIC cost of the benefits included in the agreement. For example, gifts provided to employees or the provision of staff entertainment are generally liable to tax and NIC (see the Gifts and Entertainment ― staff guidance notes) but are provided by employers as a perk. The popularity of such gifts and events with the employees would therefore be reduced if they had to pay tax on the benefit. The PSA passes the tax and NIC liability on these benefits to the employer so the employee receives the benefit free of any tax or NIC.Using a PSA can save significant administrative costs as there is no need to report minor and incidental benefits individually; however, the tax and NIC cost is significant, so it will be necessary for the employer to balance the cost of tax and NIC versus time spent on administration.See Example 1.For more, see Simon’s Taxes E4.11110.Why might an employer not want to put a PSA in place?A PSA is expensive for the employer as it must pay grossed-up tax on the benefit as well as Class 1B

Payroll e-filing

Payroll e-filingE-filingPayroll e-filing is compulsory for virtually all employers. This is the case for both in-year and year-end filing. These requirements are part of real time information (RTI) reporting. See the Monthly payroll compliance, Annual payroll compliance and Real time information guidance notes.Employers exempted from electronic filing are those who are:•a practising member of a religious society or order whose beliefs are incompatible with the use of electronic communications, or•‘care and support’ employers ― these are employers who employ someone to provide domestic or personal services at or from the employer’s homeHMRC will also consider allowing an exemption from online filing for employers:•with a disability which