Income Tax

A taxable benefit arises when an employer provides a car for an employee's private use (including home-to-work commuting). The benefit is based on the car's list price and its CO₂ emissions.

Car benefit = List price × Appropriate percentage

List price: The manufacturer's list price when new (including delivery charges, VAT, and accessories fitted before the car was first made available) minus any capital contribution by the employee (max deduction £5,000).

Appropriate percentage: Determined by the car's CO₂ emissions. The percentage starts at 2% for zero-emission (electric) vehicles and increases by 1% for each additional 5g/km of CO₂ above a threshold, up to a maximum of 37%. Diesel cars that do not meet the RDE2 standard have a 4% supplement (also capped at 37% total). Exact percentages are provided in the exam tax tables — you do not need to memorise them.

Reductions:

• If the car is unavailable for part of the year (e.g., provided from 1 July): time-apportion the benefit (e.g., 9/12 for July–March)
• If the employee makes a revenue contribution (pays the employer for private use): deduct from the calculated benefit (the benefit cannot become negative)

Pool cars (available to multiple employees, not ordinarily kept at any employee's home, used mainly for business): exempt — no taxable benefit.

If the employer provides fuel for private use in the company car, an additional benefit arises.

Fuel benefit = Fixed multiplier × Appropriate percentage (same % as the car benefit)

The fixed multiplier is set annually (2024/25: £27,800). The appropriate percentage is the same as used for the car benefit calculation.

Key points:

• The fuel benefit is an all-or-nothing charge. If the employer provides ANY fuel for private use, the full benefit applies. There is no reduction for partial private fuel — unless the employee reimburses the full cost of all private fuel to the employer, in which case the benefit is nil.
• Time-apportion if the car (and fuel) was unavailable for part of the year
• If fuel provision ceases during the year and is not reinstated in the same tax year, time-apportion to the date it ceased

A taxable benefit arises when an employer provides living accommodation for an employee (a house, flat, or other dwelling provided rent-free or at a reduced rent).

Exemptions (no taxable benefit):

• Accommodation is necessary for the proper performance of duties (e.g., a caretaker living on site, a lighthouse keeper)
• Accommodation is customarily provided for employees in that type of employment and helps them perform their duties better (e.g., clergy, armed forces, some farm workers)
• Accommodation is provided for security reasons and there is a special threat (e.g., senior government officials)

If NOT exempt, two charges apply:

Basic charge:

= Annual value of the property (the rateable value) − Any rent paid by the employee

Additional (expensive accommodation) charge:

Applies if the cost of the property exceeds £75,000:

= (Cost of property − £75,000) × HMRC official interest rate

"Cost" includes the original purchase price plus the cost of any improvements made before the start of the tax year. If the employer has owned the property for more than 6 years before first providing it to the employee, use the market value at the date first provided (plus subsequent improvements) instead of original cost.

General rule: Most non-cash benefits provided by reason of employment are taxable. The taxable amount is generally the cost to the employer of providing the benefit, less any amount the employee pays for it.

Common BIKs:

Exempt benefits (not taxable): Employer pension contributions, workplace parking, one annual party/function (cost ≤ £150 per head), eye tests for VDU users, cycle-to-work scheme, removal expenses (up to £8,000), long-service awards (≥20 years, max £50/year of service), work-related training, death-in-service benefits.

Employees can deduct certain expenses from their employment income if the expense is incurred wholly, exclusively, and necessarily in the performance of their duties (ITEPA s.336). This is a strict test — much stricter than the "wholly and exclusively" test for trading income.

• Travel expenses: Business travel (not ordinary commuting). Mileage allowance relief if the employer's mileage rate is below the approved HMRC rate (45p/mile for first 10,000 miles, 25p thereafter for cars).
• Professional subscriptions: Fees to a professional body relevant to the employment (on HMRC's approved list — e.g., ICAEW, ACCA, Law Society)
• Pension contributions: Employee's own contributions to a registered pension scheme (relief given in the computation or via PAYE)
• Charitable donations under payroll giving: Deducted from gross pay before tax

Whether an activity constitutes a "trade" is a question of fact, determined by the badges of trade:

• Subject matter: Is the item one that could only be turned to advantage by sale (e.g., a large quantity of toilet rolls)? If so, more likely trading.
• Length of ownership: A short period of ownership suggests trading; long-term holding suggests investment.
• Frequency of transactions: Repeated, similar transactions suggest trading; a one-off transaction is more likely investment.
• Supplementary work: If the taxpayer improved or modified the item before selling (e.g., dividing land into plots), this suggests trading.
• Motive: Was there an intention to make a profit? A profit motive suggests trading.
• Method of finance: Borrowing to buy suggests the item was always intended for quick resale (trading).

These are indicators, not a definitive checklist — the courts consider the overall picture.

The accounting profit is the starting point for the tax computation. It must be adjusted to arrive at the taxable trading profit because some items in the accounts are not allowable for tax or are treated differently.

Net profit per accounts + Disallowed expenditure − Non-trading income (already taxed elsewhere) = Adjusted trading profit (before capital allowances)

Disallowable expenditure (add back to accounting profit):

• Capital expenditure: Cost of buying/improving fixed assets (relieved through capital allowances instead)
• Depreciation and amortisation: Accounting charges replaced by capital allowances
• Entertaining: Client/customer entertaining (but staff entertaining is allowable, e.g., annual Christmas party)
• Donations: Political donations, general charitable donations (but small local charity donations and sponsorship with a business purpose may be allowable)
• Fines and penalties: Fines for breaking the law (parking fines, HSE fines, tax penalties) — not "wholly and exclusively" for trade
• Non-trade expenses: Private element of any expense (e.g., private use of car — disallow the private proportion)
• Provisions: General provisions are disallowed; specific provisions for known debts may be allowable
• Profit/loss on disposal of fixed assets: Dealt with through capital allowances, not in the trading profit adjustment

Non-trading income (deduct from accounting profit):

• Bank interest received (taxed as savings income)
• Dividends received (taxed as dividend income)
• Rental income (taxed as property income)
• Profit on disposal of fixed assets (dealt with via capital allowances/CGT)

Capital allowances are the tax equivalent of depreciation — they give tax relief for capital expenditure on plant and machinery used in the trade. Depreciation is added back, and capital allowances are deducted instead.

Annual Investment Allowance (AIA):

• 100% first-year relief on the first £1,000,000 of qualifying plant and machinery expenditure each year
• Available to all businesses (individuals and companies)
• Applies to most plant and machinery (but NOT cars)
• Any expenditure above the AIA limit goes into the appropriate pool for WDA

First-Year Allowance (FYA):

• 100% FYA for new zero-emission cars and new electric vehicle charge points
• Full expensing (100% FYA) for qualifying new plant and machinery acquired by companies (from April 2023 — permanent)

Writing-Down Allowance (WDA):

• Main pool: 18% WDA on the reducing balance. Includes most plant and machinery, cars with CO₂ emissions of 1-50 g/km.
• Special rate pool: 6% WDA on the reducing balance. Includes: integral features of buildings (lifts, escalators, electrical/cold water systems, heating, air conditioning), long-life assets (useful economic life ≥ 25 years), thermal insulation, and cars with CO₂ emissions exceeding 50 g/km.
• Cars:
  • Zero-emission: 100% FYA (new only)
  • 1-50 g/km CO₂: main pool (18% WDA)
  • Over 50 g/km CO₂: special rate pool (6% WDA)

Small pools allowance: If the balance on the main pool or special rate pool is £1,000 or less, the entire balance can be written off in full (rather than applying the WDA percentage).

Balancing allowance/charge: When an asset is disposed of or the business ceases, a balancing allowance (if proceeds < pool balance) or balancing charge (if proceeds > pool balance) arises. For the main and special rate pools, balancing adjustments only arise on cessation of the business (not on disposal of individual assets within the pool — disposal proceeds are simply deducted from the pool). For assets with a private use element (sole traders only), the allowances and charges are restricted to the business-use proportion.

Structures and Buildings Allowance (SBA):

• 3% straight-line annual allowance on the construction or renovation cost of qualifying commercial structures and buildings
• Available from the date the building is first brought into qualifying use
• Does not include the cost of land or dwelling houses (residential property)
• On disposal: any remaining unrelieved cost passes to the new owner (no balancing allowance or charge)