What income is taxable?
This page deals only with income that you get from an employer – employment income. We look at whether or not the different parts of your employment package are taxable. Income does not have to be in monetary form – it can be payment in kind.
You do not have to pay tax on all your income. In tax terms, some income is called taxable – you have to pay tax on it, and some is non-taxable, not taxable, exempt or tax-free – you do not have to pay tax on it.
If you want to know whether different types of income are taxable or not, we suggest you visit our page with more general information in the tax basics section. If you want to know whether different state benefits and tax credits are taxable or not, we suggest you visit our section on tax credits and benefits.
This page is for you if you are an employee with a UK employment and you are UK resident and domiciled for tax purposes. If this is not the case, the rules may be different and you may need to seek advice from a tax adviser. We tell you how you can find a tax adviser in our Getting Help section.
What employment income is taxable?
The following list includes some of the main types of employment income that are normally taxable.
- Wages and salaries, including any advances, pay paid while you were furloughed and holiday pay. It does not matter how your employer pays you, providing that they operate Pay As You Earn (PAYE) correctly – cheque, cash in hand or bank transfer are all possible. It does not matter how frequently you are paid – it can be monthly, weekly, daily, or at irregular intervals. It does not matter whether you receive the same amount each payday or a variable amount, dependent on the number of hours you work. Your employer must give you a payslip each payday, either electronically or in hard copy.
- Certain benefits-in-kind, which might also be called ‘perks’ of your job. This includes things like company cars and private medical insurance.
- Bonuses, commission and tips – if your employer pays you a bonus or commission, you must pay tax on it. Usually, your employer operates PAYE, just like on your wages or salary. If you receive tips from customers, you have to pay income tax on them, but you may not have to pay National Insurance contributions (NIC). The way in which you work out your tax/NIC on tips depends on who the tips are given to and who decides how to share the tips. There is more information on the tax and NIC position of tips on GOV.UK. We have also written a news article on this topic.
- Backdated pay awards – although the rules can be complex (see below for more information).
- Expenses not wholly, exclusively and necessarily incurred to do the job, and that are paid or reimbursed by your employer, including:
- Travelling expenses between your home and permanent place of employment
- Expenses incurred for the care of a member of your family, such as child minding costs
- Other ‘private’ expenses
- Vouchers that can be exchanged for cash, goods or services, for example gift vouchers.
- Income from a second or third job.
- Some share awards and share option gains
- Payment in lieu of remuneration, such as a payment made by a liquidator when a company has been wound up and employees are owed earnings.
- Protective awards which may be ordered by an Employment Tribunal if an employer has not given a trade union the statutory notice of redundancies.
- Redundancy/leaving payments over £30,000 and from April 2018, all payments in lieu of notice. Note there are slightly different rules for redundancy payments made to members of the armed forces.
- Retainers – a retainer is a payment made for a period when no actual work is carried out, such as payment made to employees of the school meals service during school holidays.
- Most round sum allowances – that is, an allowance which is paid to you irrespective of whether or not you spend it in a particular way. However tax relief may be available to an employee if any of the round sum allowance is spent on qualifying expenses.
- Statutory payments, such as statutory sick pay, statutory maternity pay and statutory paternity pay.
What employment income is tax free?
The following list includes some of the main types of employment income that are normally tax-free.
- Redundancy payments or compensation for loss of employment up to £30,000, subject to certain rules. This is a complex area. You can find more information on our redundancy payments page. Note that any payments made instead of paying you for your notice period are liable to income tax.
- Certain benefits-in-kind, including trivial benefits and employer contributions into an approved pension, subject to certain limits.
- Employer sponsored courses
- Long service awards where the gift meets certain criteria – the gift must be a non-cash award; the award must mark at least 20 years of service by the employee; the employer must not have made another long-service award to the same employee within the previous 10 years; the award must be worth no more than £50 per year of service.
- Payment or reimbursement of expenses, wholly, exclusively and necessarily for your employment.
When do I pay tax on a backdated pay award?
Employees are generally taxed on their earnings at the date of receipt.
For cash payments, this means the earlier of:
- ‘Rule 1’ – the date that the payment is physically made; or
- ‘Rule 2’ – the date the employee becomes legally entitled to the payment.
In this context, the taxation of backpay can be quite confusing – it depends on why the arrears have arisen.
If there was no legal obligation for your employer to give you the pay rise in the first place, the amount would be fully taxable in the year you receive it, rather than in any earlier tax year.
On the other hand, if the backpay has arisen because there has been a breach of employment law (e.g. the holiday pay rules, minimum wage rules, or equal pay rules) then HMRC guidance confirms that the tax is due on the arrears in the year of entitlement not the year of payment. In this case, you may have to ask your employer to tax it in the various relevant tax years.
How is my pay taxed if I work overseas in the armed forces?
Most service personnel working abroad will continue to pay income tax and National Insurance in the UK as normal on their armed forces pay. The only exception may be if you
- were recruited overseas; and
- are not resident in the UK; and
- the maximum rate of pay for your grade is less than that of an executive officer in the UK civil service working in Inner London.
If you are a member or Officer of the Royal Gurkhas this exception does not apply to you and you will remain liable to tax in the UK on your armed forces pay.
Where can I find more information?
If your employment package contains types of income that we do not cover, for example, 'non-taxable' investment payments, grants, loans, credits and so on then you should be very wary.
Some non-compliant umbrella companies pay people using non-taxable payments, often routed through a third party like a trust. But if payments are routed through a third party like this, they are very likely to fall foul of the very substantial suite of anti-avoidance legislation that we have, called the ‘disguised remuneration’ rules.
Some non-compliant umbrellas major on the fact that the non-taxable payment isn't routed through a third party so therefore doesn’t fall foul of the special disguised remuneration rules.
That may be correct but what they fail to mention is that it is highly likely to be plain old employment income under general principles – the charging provision for employment income is very wide indeed.
(For anyone with a technical interest in the rules section 62 ITEPA 2003 is the main charging provision and defines “earnings” as:
- Any salary, wages or fee;
- Any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth;
- Anything else that constitutes an emolument of the employment.)
If you find yourself in such an arrangement, you may need to contact HMRC or get advice from a tax adviser. You can find a paid tax adviser using the search tool from the Chartered Institute of Taxation.
You can find out where to get help with your taxes from the tax charities, in our Getting help section.
You can find an A to Z list of typical employment income elements and benefits and the treatment on GOV.UK. Although this is aimed at employers, it will be useful more widely.
For technical information, see HMRC’s Employment Income manual which provides detailed guidance on treatment of particular items of employment income and benefits.