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Taxation System in the United Kingdom

Taxation in United Kingdom

On a broader level, taxation in the United Kingdom involve three different levels of government such as: The Central Government, which is also commonly known as Her Majesty’s Revenue and Customs (HMRC), devolved government and local government. Each government deals with different types of taxes, for example, the revenue of central government comes from income tax, national insurance contributions (NIC), value added tax, corporation tax and fuel duty whereas the revenue of local government comes from grants from central government funds, council tax, fees from on-street parking etc.

What Income is Taxable in the United Kingdom?

It is not necessary that you have to pay tax on all your income. In other words, some income falls under taxable category i.e. you do have to pay tax on it, and some is non-taxable, also called as tax-free or exempt i.e. you do not have to pay tax on it. The following list includes taxable income, i.e. you need to pay tax on it, such as:

  • Wages & Salaries
  • Benefits in Kind, also known as ‘perks’ of your job.
  • Bonus, Commission and Tips
  • Backdated Pay Awards
  • Expenses such as traveling expenses between your home (claimant’s) home and place of employment etc.
  • Vouchers which can be exchanged for cash, goods or services.
  • Payment in lieu of remuneration, such as a payment made by a liquidator, in case the company has been wound up and employees are owed earnings.
  • Redundancy/leaving payments over £30,000.
  • Retainer- which is a payment made for a period when no actual work is carried out.
  • Statutory employment benefits, such as statutory sick pay, statutory maternity and paternity pay.

The following list includes non-taxable income, i.e. you don’t have to pay tax on it, such as:

  • Employer sponsored courses.
  • Redundancy payments or compensation for loss of employment up to £30,000.
  • Long service awards.
  • Reimbursement of expenses, which you have used completely for your employment.

How is Commission Taxed in the United Kingdom?

Commission is a payment based on the individual worker’s or entire team’s performance and it is common among sales workers to provide an incentive to sell and since there is a commission involved, the sales workers have lower basic salaries than other workers. However, in certain companies, some workers are paid by commission only and as an employer, if you are choosing a commission-based pay or pay which is part basic pay, part commission pay, you must always ensure that a worker is always paid at least the national minimum wage.

Commission falls under taxable income i.e. the recipient of the commission has to pay tax on it because the commission paid to you at your work by your employer does not count towards the National Minimum Wage and hence it is a taxable income. There are various ways by which you can get your commission, such as:

  • Cash at the end of a shift or from a customer.
  • A part of your pay.
  • An amount which is pooled and shared amongst all staff, also called as “tronc”. In this case, there is an assigned person who looks after it, who is known as “troncmaster”.

In case of commission, apart from paying income tax on it, you might need to spend National Insurance Contributions (NIC) on it as well. However, whether you have to pay the National Insurance Contribution on it or not, will depend on the following two factors:

  • Who is getting the commission?
  • How is it going to be shared out?

And in case, you have got your commission in form of cash, directly from a customer, it will fall under taxable income; however, you don’t have to pay National Insurance Contributions and like in case of your salary, you need to mention the commission amount in your Self-Assessment form. In case you miss out on giving this particular information to HM Revenue and Customs (HMRC), they will seek this particular information, either from you or from your employer. And in case you are the employer, HMRC will allocate a particular tax code, which is used to collect tax through PAYE i.e. Pay As You Earn and tax is collected before the wages are distributed. In case of commission being pooled in and shared out, it becomes the duty of the troncmaster to ensure that, both the tax and the National Insurance are paid well on time, whereas it is the duty of you, as an employer, to update HMRC, about the tronc and the details of troncmaster, so that they can seek the required information from him, in case it is not filled in your Self-Assessment Form.

In case you are entitled for the commission, your commission should be paid through your salary and therefore it will be taxed with your salary itself, at the rate of 20%. However, in case earning through your salary is more than £40,835 for this year and £43,875 for next year, then any commission will be charged at the rate of 40%.

Non-Payment of Commission:

In case you are not getting the commission you are entitled for and you think there’s been a mistake, you can do the following:

  • Speak to your employer to see if there’s been a misunderstanding.
  • Ask your employer to give you in writing regarding how they have paid your pay.
  • Keep copies of any letters from your employer and notes of any meetings.

However, before doing any of the above, you need to go through your contract thoroughly to ensure that your understanding is right, because non-payment of the commission, if mentioned in the contract, is a breach of contract and it can be covered legally under:

  • Unlawful Deductions from Wages: It is applicable when you are entitled for a certain amount of commission as per terms of your contract, but you are not getting paid the same.
  • Unlawful Discrimination: This is applicable when you are being discriminated based on the group you belong to, such as, giving smaller commission to women.

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