Employment income is charged to both income tax (as ‘general’ income) and to Class 1 National Insurance Contributions. Tax and NIC are normally paid by the employer through the PAYE system, but an employee whose tax is not fully paid should complete a tax return and settle the liability as described in Personal Taxation.

If the tax underpaid is up to £2,000 and the 2008/09 tax return is submitted by 30 September 2009, or e-filed by 30 December 2009 the underpayment can be settled through PAYE for 2010/11 rather than being collected on 31 January 2010.

No NIC are payable by employee or employer on earnings up to the PT.

A person with more than one employment can defer the payment of some employee NIC until after the end of the tax year, when the total amount payable can be checked and limited so the full 11% rate is only applied to income between the PT and the UEL.

Employee benefits are usually valued at a ‘cash equivalent’ and are then charged to income tax on the employee and Class IA NIC (at 12.8%) on the employer. The cash equivalent is generally based on the cost to the employer of providing the benefit, but the following are charged according to a statutory formula.

Cars provided by the employer: a percentage of the original list price of the car, depending on the CO2 emissions rating of the car.

Fuel provided by the employer for private use in a company car is charged without reduction for contributions unless all private fuel is paid for by the employee.

Loans of money of over £5,000 are charged on the excess of the official rate (6.25% since 6.4.07, subject to change) over any interest actually paid by the employee to the employer.

Use of assets is charged at 20% of the original cost of the assets to the employer, or the value when first made available to the employee, less any amount paid by the employee for private use.

Main exempt benefits

Many employee benefits are not charged to tax. A full list cannot be given here, but some of the principal ones are:

• Providing one mobile phone, even with private use.
• Subsidised meals available to employees in a staff restaurant or canteen
• The provision of ‘green transport’ such as works buses or the use of a bicycle for commuting.

Other exempt payments to or for employees

• Mileage allowance of up to 24p per mile for business use of the employee’s motorcycle or 20p per mile for a pedal cycle
• Contributions to approved pension schemes
• Payments of up to £5 a night when staying away for ‘personal incidental expenses’ (£10 if abroad)

Employee share schemes

Generally, employees are charged to income tax on the value of shares that they are given or issued by their employer, less any amount paid for the shares. This applies to ‘free shares’ and to shares acquired under option schemes. NIC is also charged if the company is quoted, as the shares cab be easily sold.

If the employer operates one of these ‘Revenue-approved’ share schemes, the tax charge may be eliminated, reduced or deferred.

Share incentive plancs (SIP)

• ‘free shares’ to £3000pa
• ‘partnership shares (employee buys with pre-tax salary ) max £1,500pa employer can ‘match’ with up to 2 or more for each one purchased.
• Shares left in the scheme for at least 5 years: no income tax or CGT on the value when they leave the scheme.

Company share option plans – share options to buy up to £30,000 of shares can be granted to employees.

Approved savings-related share option plans – employees contribute to a Save As You Earn plan (max.£250 a month) to save the money needed to exercise options.

With approved options schemes, the employee pays CGI on sale of the shares rather than income tax/NIC on exercising the options. The CGI charge is likely to be smaller and later than the IT/NIC