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HMRC internal manual

Tax Credits Manual

From
HM Revenue & Customs
Updated
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Eligibility - income (employed and self-employed): Taxable earnings adjustments (Info)

The adjustments required to taxable earnings to determine income from earnings for tax credit purposes are

  • reduction of up to £100 for each week of Statutory Maternity Pay and (from 2003-2004 onwards) Statutory Paternity Pay or Statutory Adoption Pay received in the tax year.
  • reduction (for year 2001-2002 only) for the amount of any taxable non-statutory redundancy pay received by the customer in the tax year before they received their form P45 (if they are using the P60 / P45 figure).

    Note: These payments are made instead of or in addition to Statutory Redundancy Pay (SRP). The Schedule E (SE) Manual at SE13775 provides some examples of when this may occur. The treatment of SRP is shown in the Additions section of this topic.

  • deduction for the amount of any fees or subscriptions paid by the customer to professional bodies and learned societies in the tax year. Use the Employment Income Manual EIM32880 for details. Details of these allowable deductions can be found in List 3 available on the HMRC internet.
  • deduction for the amount of any employee liabilities and indemnity insurance premiums paid by the customer or the amount of charges incurred in respect of qualifying liabilities in the tax year. Use the Employment Income Manual EIM30505 for details.
  • deduction for the amount of any entertainer’s agent fees incurred in the tax year. Use the Employment Income Manual EIM62800 for details.
  • deduction (for year 2003-2004 onwards) where mileage allowance payments made to the employee or director are less than the approved amount. Use the Employment Income Manual EIM31330 to EIM31385 for details.
  • deduction (for year 2003-2004 onwards) for the following expenses

    • wholly, exclusively and necessarily incurred in the performance of the duties of the employment (use the Employment Income Manual EIM31620 to EIM31665). Where there is an approved flat rate for an expense incurred, employees may deduct either the approved flat rate or actual cost. Whilst a deduction should only be made by customers where the rules allow, a deduction doesn’t have to have been claimed for income tax purposes before it can be made for tax credits purposes for a particular year.
    • Ministers of Religion may also deduct a proportion of the rent of their house and any expenses borne in the maintenance, repair, insurance or management of church property (use the Employment Income Manual EIM60044).
    • travel expenses and accommodation and subsistence costs connected with work overseas (use the Employment Income Manual EIM34000 to EIM34090).
    • costs and expenses in respect of personal security assets and services to meet an employment related threat (use the Employment Income Manual EIM21810).
  • addition for the amount of any strike pay received by the customer in the tax year as a member of a trade union.
  • addition (for the year 2003-2004 onwards) for the taxable amount of any payments or benefits received on termination of employment and after the customer received their form P45 (if they are using the P60 / P45 figure).

This includes

* damages for breach of employment contract 
* agreement for benefits provided during employment to continue beyond the termination 
* redundancy pay 
* compensation payments for wrongful and unfair dismissal.

The amount to include as income is the amount in excess of £30,000. Note: If payment was made before the P45 was issued by the employer, then this will already include any taxable amount of SRP and won’t require further adjustment for tax credit purposes. If payment was made after the issue of the P45, the employer should have notified the customer how much of any payment was taxable.

The taxable amount of any SRP payment made after the P45 issue (in the same tax year) will need to be added to the P45 taxable pay figure to achieve the income from the employment for tax credit purposes. (Use the Employment Income Manual EIM12800 onwards for further details).

2001-2002 year only - the taxable amount of a payment under the Employment Rights Act 1996 received after the customer received their form P45.

The amount to include as income is the amount in excess of £30,000. However, this is narrower as it only covers statutory payments - that is, statutory redundancy pay and compensation for unfair dismissal. Note that non-statutory redundancy pay and compensation for wrongful dismissal are also taxed under s148 ICTA 1988 but for tax credit purposes, can be ignored in full for this year (use the Schedule E Manual SE13775 for details of non-statutory redundancy schemes and payments).

  • addition (for year 2003-2004 onwards) for the taxable amount of any other payments associated with the termination of employment, received in the tax year but after the customer received their form P45 (if they are using the P60 or P45 figure). For example, damages, compensation or non-statutory redundancy payments. Use the Employment Income Manual EIM13000 to EIM13995 for details.
  • addition (for year 2003-2004 onwards) for the taxable amount of any gains or benefits arising from employment related shares, other securities and share or securities options not already included in the P60 or P45 pay figure for the year. PAYE should have been operated (on a best estimate basis) for the majority of taxable gains. Those not included are those made where

    • an option to buy shares or other securities has been exercised under the Save As You Earn (SAYE) HMRC Approved Share Scheme within three years of receiving it. The taxable amount is the difference between the market value of the shares at the time the option is exercised and the amount paid for the shares
    • gains have been made on the acquisition of shares or other securities that couldn’t easily be traded or readily converted, or on the exercise of share and securities options to acquire such shares and securities

    and

    • benefits arising from shares or securities where the benefit itself isn’t in an easily tradable or readily convertible form.