Cutting Your Tax Bill If You Are A Lower Paid Worker

There has been considerable debate in recent months concerning the apparently disproportionately large amount of tax paid by those on low incomes. While it is certainly true that the lowest-paid sector of society pays a larger proportion of their income in tax than the highest-paid sector there is still a wide range of tax relief available for those earning a low wage.

Tax and the Earnings Threshold

The rules regarding the taxation of benefits can appear complicated. Essentially, not all benefits are taxable, regardless of your income; this includes both state benefits and ‘fringe’ benefits offered by your employer. However, for those on a lower income even those benefits that are normally taxable may not be. The magic number in these circumstances is £8,500; this is the threshold against which an individual’s eligibility for extra tax relief on benefits is judged. For those who earn more than £8,500 per annum the regular tax rules will remain in force. However, if you are earning less than this figure then you will fall into the category that receives extra help from the state.

If your earnings fall below the threshold, the benefits on which you will be liable for income tax will be determined by their cash value. Some benefits received from the state, or from an employer, can be transferred into cash, and it is these on which you will be required to pay income tax. For example, you may have received a computer as a fringe benefit from your employer. The price that your employer paid for this computer is not relevant; rather, your income tax liability is judged on the cash value of the benefit if you were to sell it second-hand on the open market.

Non-Taxable Benefits

If benefits for these individuals are taxable only with reference to their cash value, there are by definition a number of benefits, which are not taxable at all. This is because some benefits are not transferable into cash; for example, some employers offer discounted private medical insurance. This is available only to the named employee and it is therefore not possible to sell on the open market. As a result, such benefits are free of tax.

In addition, there are several other benefits that will be taxed in the same way regardless of whether your earnings fall above or below the earnings threshold. One of the most commonly received of this type of benefit is the childcare voucher, which is available through schemes administered by some employers. This type of voucher is never subject to tax, although most other vouchers are as they can be used in exchange for goods or services.

Living accommodation is treated in the same way; if your job requires you to be offered a place to live by your employer then this benefit will be exempt from tax. Those earning less than £8,500 are, however, eligible for extra relief on heating, lighting and furnishings, as these benefits theoretically cannot be transferred into cash. It should be noted, however, that if it were judged that you do not require specific living accommodation in order to perform your job properly then this benefit would still be subject to tax regardless of your earnings.