EIM01135 - Financial loss allowances: lost employment income: examples

Section 299A ITEPA 2003

Example 1

Louise has a monthly salary of £4,000. After deductions of tax and NICs she receives monthly payments of £2,968.31. In July 2018, Louise spends one week carrying out the duties of a voluntary office she holds with her district council. As she is not performing her normal work duties during that period her employer reduces her July salary to £3,000. After deductions of tax and NICs she therefore receives a payment of £2,313.31.

Louise has received £645 (£2,968.31 − £2,313.31) less than she would normally have received from her employer. Provided it does not exceed £645, any payment that she receives from her district council will not be liable to income tax. If the amount she receives exceeds £645, the exemption can only apply if the excess amount solely represents reasonable expenses that she incurred in carrying out the duties of the voluntary office.

Example 2

Adam works from Monday to Friday and is paid monthly by his employer. He receives a basic monthly salary of £1,200 and an additional amount based on commission. In August 2018, he spends 2 normal working days carrying out the duties of a voluntary office he holds with his parish council.

Adam’s employer does not reduce his normal basic salary so the financial loss that he incurs is the amount of commission that he could have been expected to receive if he had worked the 2 days on which he was carrying out his voluntary duties.

When Adam was paid at the end of July his annual earnings to date were £9,150. This consisted of £4,800 basic salary and £4,350 commission. In the period from April to July there were 87 working days. Adam’s commission to the end of July therefore amounted to an average of £50 for each working day (£4,350 ÷ 87).

At the end of August, Adam’s gross pay is £2,250. This consists of £1,200 basic salary and commission of £1,050. After deduction of tax and NICs, he receives payment of £1,803.31.

Based on his average daily commission rate of £50, Adam would have expected to add another £100 to his gross pay for August if he had not spent 2 days carrying out his voluntary office-holder duties. His total pay would therefore have been £2,350 and after deductions of tax and NICs he would have been made a payment of £1,871.31.

Adam has therefore suffered a loss of employment income of £68 (£1,871.31 − £1,803.31). Provided it does not exceed that amount, any payment that he receives from his parish council will not be liable to income tax. If the amount he receives exceeds £68 the exemption can only apply if the excess amount solely represents reasonable expenses that he incurred in carrying out the duties of the voluntary office.