How to Pass the ACA Principles of Taxation Module: Understanding Employment Income

Mastering the intricacies of employment income is crucial for success in the ACA Principles of Taxation module. This guide will help you navigate the essential topics, including how to calculate assessable employment income, identify taxable and exempt benefits, and understand the PAYE system.

Employment Income Calculation

What is Employment Income?

• Definition: Employment income includes earnings from employment and income received by office holders (e.g., directors).
• Types of Employment Income:
  • General earnings: Salary, wages, fees, gratuities, and other profits or benefits derived by an employee. This includes bonuses, commissions, expense reimbursements, and inducements.

Basis of Assessment:

• Employment income is assessed on a receipts basis, which means that income received between 6 April 2023 and 5 April 2024 is taxable in the 2023/24 tax year.
• General earnings in monetary form are treated as received at the earlier of the payment date or the date the person becomes entitled to the payment.

Taxable and Exempt Benefits

The Benefits Code:

• Taxable benefits are outlined in the benefits code and are taxed under the PAYE system. Examples include:
  • Vouchers
  • Living accommodation
  • Cars and vans for private use
  • Non-monetary benefits provided by the employer
• Benefits can be reduced to nil if the employee reimburses the employer by 6 July following the tax year.

Key Taxable Benefits:

• Vouchers: Taxable amounts are based on their cash value or the cost to the employer minus employee contributions.
• Living Accommodation:
  • Job-related accommodation: Exempt if necessary for job performance, customary for the role, or provided for security reasons.
  • Non-job-related accommodation: Taxable benefit is based on the annual value or rent paid by the employer, with additional charges for properties costing over £75,000.
• Cars and Fuel for Private Use: Calculated based on the car’s list price and CO2 emissions, with varying percentages applied.
• Other Notable Benefits: Vans for private use, assets provided for private use, and other non-monetary benefits are taxable, with specific rules for calculation.

Exempt Benefits:

• Employer contributions to registered pension schemes
• Trivial benefits costing less than £50 (capped at £300 for certain directors)
• Annual social events up to £150 per head
• Work-related training courses
• One mobile phone for private use
• Vehicle battery charging facilities at the workplace

PAYE System

Definition and Purpose:

• PAYE (Pay As You Earn) is HMRC’s system for collecting income tax and National Insurance contributions. Employers deduct these directly from employees’ earnings.
• Applies to all cash payments and certain assets convertible to cash.

PAYE Codes:

• Tax codes are calculated based on allowances and deductions. Codes may include letters indicating specific allowances (e.g., ‘L’ for the basic personal allowance).
• Codes like ‘K’ indicate negative adjustments, increasing taxable income.

Real Time Information (RTI):

• Employers report deductions to HMRC each payday through RTI, ensuring accurate tax and NICs payment throughout the year.
• RTI integrates with payroll software to simplify reporting and compliance.

Next Steps

Mastering employment income concepts will greatly enhance your understanding of the Principles of Taxation module. For more resources to support your learning and exam preparation, check out our Certificate Level subscription here. Equip yourself with the tools needed for ACA success!