Employment Tax Rates Explained

In this series of articles, we have set out the various different tax rates that may be applicable to you. In the last article we set out details of personal tax rates, and in this article, we take a closer look at employment taxes. 

Employment Benefits and Expenses

If you are an employee and you receive employment benefits, such as a company car or private health insurance, you will pay tax on the value of the benefit, as though it were additional salary paid to you. The taxable value of the benefit is generally the cost to your employer, and they will notify you each year what this is. You will not need to pay National Insurance Contributions (NICs) on the benefit value, but your employer will.

Exempt benefits

Certain benefits are exempt and do not lead to additional tax being due. 

Trivial benefits 

Employers can provide exempt ‘trivial benefits’ if certain conditions are met. 

For the exemption to apply, the trivial benefit must be within the above limits. It cannot be a cash gift, contractual or a performance reward. A great example is an employer giving an employee a bunch of flowers or a gift card for their birthday or celebrated holiday; the taxman will not expect a share of this.

Company vehicles

For company cars, the list price of the car when it was new and its carbon dioxide emissions or electric range will determine the benefit value; with energy-efficient cars costing less tax than ‘gas guzzlers’. The benefit value is further increased if the employer provides the fuel for private journeys. Please talk to us before providing or receiving a company car as the benefit calculations can be complex and they will differ over the expected usage period of the car. 

For company vans and commercial vehicles, the benefit value is usually much less, even if fuel is provided for private journeys. These benefits are a simple flat rate, set per tax year.

The distinction between cars and commercial vehicles comes with complicated tax principles and guidance.

Homeworking 

You may be able to claim additional tax relief if you have to work from home under the terms of your employment. This may be because your job requires you to live far away from your place of work or your employer does not have an office. In this situation, you can either claim tax relief at a set amount of £6 per week (or otherwise evidenced higher sum) or your employer may pay this amount to you as a tax-free amount. If you choose to work from home, tax relief is unfortunately not available.

Business travel

Your employer may reimburse you for your costs of undertaking business travel and the money you receive is not usually subject to tax. This includes your employer reimbursing you for business miles travelled in your own car at a mileage rate of no more than set ‘approved’ rate.

Unless your home is your regular place of work, business travel does not include your home-to-work journey.

Other benefits or reimbursements

Lots of other arrangements between employers and employees give rise to taxable benefits or trigger rules for reimbursed expenses. Please contact us to discuss your benefits package.

National Insurance Contributions For Employees 

 As an employee, you pay primary Class 1 National Insurance Contributions (NICs). The monthly thresholds and rates are as follows:

Earnings below the LEL are not subject to primary Class 1 NICs and do not accrue entitlement to state benefits. Earnings between the LEL and the PT do accrue entitlement to state benefits and are subject to primary Class 1 NICs, albeit at the 0% rate.

National Insurance Contributions for Employers

As an employer, when you pay wages, you need to pay secondary Class 1 National Insurance Contributions (NICs) on top. You will also need to pay Class 1A NICs on most employment benefits (see above) that you provide to your employees. The monthly thresholds and rates are as follows:

Higher STs apply for employees who are under 21 and apprentices under 25. Other variations also apply.

Employment Allowance

Eligible employers can claim an employment allowance to reduce their secondary Class 1 NIC liability. Eligibility is based on several factors, although the requirement for the previous year’s employers’ Class 1 NIC liability to be less than £100,000 is removed for 2025/26.

Connected employers are only entitled to one allowance between them. Sole director companies without other employees may not be able to claim the allowance.

National Living and Minimum Wage

Employers must pay their employees at least the national minimum wage. This is termed the national living wage for workers aged over 21. The minimum hourly rates change on 1 April each year and depend on the worker’s age and whether they are an apprentice. 

National Insurance Contributions for the Self-Employed

In addition to paying income tax on your self-employed profits, you may also need to pay Class 2 and Class 4 National Insurance Contributions (NICs). Class 2 NICs provide you with entitlement to certain state benefits. Class 4 NICs are effectively an additional tax. The relevant rates and thresholds are:

* Since 2024/25, Class 2 NICs are effectively abolished. If your trade profits exceed the SPT, you will accrue entitlement to state benefits. However, if your trade profits fall below the SPT, you will need to pay Class 2 NICs voluntarily if you need the tax year to qualify for state benefit purposes.

In our next article about tax rates, we will take a look at VAT, corporation tax and business tax reliefs. However, if you would like to discuss any of the issues raised in this article, please get in touch. 

This summary provides only an overview. No action should be taken without consulting the detailed legislation or seeking professional advice.  Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this summary can be accepted by the authors or the firm.