Appendix 4: Taxable Payments

See also:

 

In certain situations payment to or on behalf of an individual may be permitted which is taxable (i.e. subject to income tax and National Insurance contributions). This appendix outlines how the tax charge is calculated in such instances so that departments and budget holders may take a more informed view on the full cost of such payments.

1. Simple summary

The effects of taxable payments are as follows:

Tax Status of Individual

Who bears the tax charge

Effect on the Individual

Effect on the University

Basic Rate (20%)

Individual

Value of payment reduced by 20%*

Cost of payment alone

 

University

Individual receives full value of the payment

Cost of payment increased by 42%

Higher Rate (40%)

Individual

Value of payment reduced by 40%*

Cost of payment alone

 

University

Individual receives full value of the payment

Cost of payment increased by 89%

Additional Rate (45%)

Individual

Value of payment reduced by 45%

Cost of payment alone

 

University

Individual receives full value of the payment

Cost of payment increased by 107%

 * with National Insurance deductions, the value will actually be reduced further, depending upon circumstances, by up to 11%.

2. Detailed background

(a) The basis of the tax charge

When a payment (either in reimbursement of an Expenses Claim or a payment made directly by the University on behalf of an individual) is deemed to be taxable, tax is usually calculated on the basis of whether the individual concerned is a basic, higher, or additional rate tax-payer.

Tax allowances and rates are published on the HMRC website.

 

(b) Who bears the tax charge?

Where a tax charge arises it is usually possible to arrange for either the recipient to bear the cost themselves or for the University to arrange to pay, either through adjusting the payment made to the individual to ensure that the correct level of tax is accounted for, or through one of the University's PSAs (PAYE Settlement Agreements).

Factors to be considered when the charge is borne by either the individual or the University are outlined in the following two sections. Budget holders should familiarize themselves with the implications of each route as the cost to the University is significantly different in each case.

Wherever possible, the University will account for tax when the charge arises - in accordance with its duties under the PAYE Regulations - rather than seek to report taxable charges via the P11D process at tax year end. This reduces the administrative burden on both the University and the individual concerned and prevents any future adjustments to the individual's tax code specific to this charge.

(c) Tax charge borne by the individual

If the individual concerned bears the tax charge then this will have the following effects upon the payment made:

 

Effects of individual bearing the tax cost of Taxable Payments:
  • For basic-rate taxpayers, they will lose the equivalent of 20% of the value of the payment;
  • For higher-rate taxpayers, they will lose the equivalent of 40% of the value of the payment;
  • For additional-rate taxpayers, they will lose the equivalent of 45% of the value of the payment;
  • In all cases the University will be charged solely with the cost of the actual payment made.

For example:

A taxable payment of £125 is made to an individual who is a basic rate tax-payer. The payment will be made as a non-pensionable additional payment via the Payroll and taxed at 20%, so the payee receives a payment after tax of £100. The actual amount will also be slightly less due to National Insurance deductions.

In this case the actual cost to the University is the same as the payment made, i.e. £125 in the example provided above.

If the individual receives a taxable benefit that the University has paid for on their behalf (as opposed to a payment in reimbursement of expenses they have outlaid), then this should be notified to the Payroll Team during the course of the tax year, i.e. when the payment is actually made, so that an adjustment can be made via payroll to reflect the taxable charge.

If the individual receives reimbursement of an expense claim then the payment itself will usually be accounted for and paid to them via the Payroll system and payment made after tax and National Insurance is deducted.

(d) Tax charge borne by the University

If the University opts to cover the cost of the tax due, either via one of the PSAs available, or by ‘grossing up’ the payment so that the value paid over is equivalent to the value of the payment after tax, then this will have the following effects:

 

Effects of University bearing the tax cost of taxable payments: 
  • In all cases, the individual will receive the full expected value of the payment but not be subjected to any further deduction of tax or National Insurance;
  • For the University, where the individual is a basic-rate taxpayer, an additional sum equivalent to approximately 42% of the value of the benefit will be charged to the budget concerned;
  • For the University, where the individual is a higher-rate taxpayer, an additional sum equivalent to approximately 89% of the value of the benefit will be charged to the budget concerned;
  • For the University, where the individual is an additional-rate taxpayer, an additional sum equivalent to approximately 107% of the value of the benefit will be charged to the budget concerned.

For example:

Three taxable payments, each of £125, are made to three individuals who are, respectively, a basic rate, higher rate, and additional rate tax-payer. The payment will be made via the Expenses Process and tax calculated and charged under one of the University's PSAs. Each payee received a payment after tax and NI of £125 each. The cost to the University for each is as follows:

  Basic rate   Higher rate   Additional rate    
  Calc.  Result (£) Calc.  Result (£)  Calc. Result (£)   
 'Gross up' of actual payment  125 x 100/80  156.25  125 x 100/60  208.33  125 x 100/55   227.27  (a)
 Tax due on gross amount  (a) x 20%  31.25  (a) x 40%  83.33  (a) x 45%  102.27  (b)
 National Insurance due (13.8%)  (a) x 13.8%  21.56   (a) x 13.8%  28.75   (a) x 13.8%  31.36  (c)
 total cost (a) plus (c)    177.81    237.08    258.63  

If the individual receives a taxable benefit that the University has paid for on their behalf (as opposed to a payment in reimbursement of expenses they have outlaid), then this should be notified to the Payroll Team during the course of the tax year, i.e. when the payment is actually made, so that an adjustment can be made via payroll to reflect the taxable charge. 

If the individual receives reimbursement of an expense claim then the payment itself will usually be accounted for and paid to them via the Payroll system and payment made after tax and National Insurance is deducted.