TCM0118060 - Eligibility - income (employed and self-employed): Earnings (Info)

Note: Directors of limited companies are classed as office holders but their earnings are classed as employment income.

Earnings from a customer’s office or employment in the tax year are defined as

  • any salary, wage or fee including any employment or self employed income
    and
  • any gratuity or other profit or incidental benefit of any kind obtained by the employee if it’s money or ‘money’s worth’. This definition from s62 Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) covers all money payments arising out of the office or employment and also some non-cash payments and employment-related benefits. For year 2001-2002, use definition of emoluments in s131 Income and Corporation Taxes Act 1988 (ICTA 1988).

Note: From tax year 2018-2019 the Ministry of Defence (MOD) are introducing a one-off payment to service personnel based in Scotland following the introduction of new Scottish income tax rates. This annual payment ensures that service personnel based in Scotland are not disadvantaged to those based elsewhere in the UK. These payments commence from May 2019 and are classed as income for tax credits purposes.

A non-cash payment or employment related benefit constitutes ‘money’s worth’ if

  • it’s received in kind and can be converted into money or something of direct monetary value to the employee. For more information, use the Employment Income Manual paragraph (para) EIM00530-EIM00570
    or
  • it takes the form of a payment to a third party to meet an employee’s obligation to pay for something - this is called ‘the pecuniary liability principle’. For more information, use the Employment Income Manual para EIM00580. An example of this is where the employer pays an employee’s rent direct to the landlord.

Note: Be aware of the following additional guidance from the Employment Income Manual

  • EIM00600 - Meaning of ‘from an office or employment’
  • EIM00610 - Important principles
  • EIM00620 - Treatment of lump sum payments.

Where an employee receives earnings that fall within the first ‘money’s worth’ definition (for example, an employment-related benefit that could be sold for cash), if the employee earns at a rate of less than £8,500 yearly, the value of the earnings for income tax and tax credits purposes will be the second hand value of the goods or assets in the employee’s hands.

For a director or an employee who earns at a rate of £8,500 or more yearly, the general rule is that the value of the earnings will be the greater of

  • the second hand value of the goods or assets in the director’s or employee’s hands
    or
  • the expense incurred by the person providing the goods or assets
    less
  • any amount paid by the employee or director to the person who incurred the expense.

However, where the asset transferred has been used or has depreciated in value since its production or acquisition by the person transferring it. the value of the earnings will be the lesser of

  • the expense originally incurred by the person transferring the asset (in producing or acquiring the asset)
    or
  • the market value of the asset at the time of transfer to the employee
    less
  • any amount paid for it by the employee
    and
  • where prior to the transfer, the depreciated asset was made available for use by one or more employees and, as a result, the asset has already been the subject of one or more employment related benefit income tax charges, the value of the earnings will be the difference between the sum (if any) paid for the asset by the employee and the higher of
    • the market value of the asset at the date of transfer
      or
    • the market value of the asset when first applied as an employment related benefit
      less
    • any sums already taken into account as taxable employment related benefits derived from the (earlier) use of that asset.

Where an employee receives earnings that fall within the ‘pecuniary liability’ principle (their debt has been settled), the value of the earnings for income tax and tax credits purposes will be the amount of the debt settled.

Note: References to the receipt of a payment of any description are references to its receipt by or on behalf of the customer or, in the case of a joint claim of either of the customers, to its receipt in any part of the world.

Special rules applied for the years 2004-2005 and 2005-2006 only to the calculation of the employment income of a customer who is a member of the Brigade of Gurkhas covered by the voluntary settlement of Gurkha tax liabilities between the Ministry of Defence and HMRC.

In these cases, the amount of employment income from that employment for a particular tax year was taken as the amount published by the Ministry of Defence as the UK equivalent rate for a serviceman of the same rank, seniority and other circumstances.

For 2006-2007 onwards, members of the Brigade of Gurkhas are treated in the same way as the rest of the Army.