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Taxation (UK) · Income from employment

Employment Income and Taxable Earnings for TX-UK

Updated 11 October 2026 · Fact-checked

Taxable employment income is the total of salary, bonuses, commission and other earnings received in the tax year, less allowable deductions. Earnings are taxed when received under the receipts basis. Expenses are deductible only if incurred wholly, exclusively and necessarily for the job. Add taxable benefits separately.

Understand Employment Income and Taxable Earnings

Employment income is what you are paid because you are an employee. It includes salary, wages, bonuses, commission, overtime and tips. It also includes taxable benefits, which are covered in their own topic. Here you focus on cash earnings and the deductions you may take.

Earnings are taxed on the receipts basis. For the tax year, you tax the earnings received in that year. Earnings are treated as received on the earlier of two dates: the date payment is actually made, or the date the employee becomes entitled to payment. For a director, other rules can bring the date forward, such as when the amount is credited in the company accounts. Check the date in the question carefully. A bonus for one year but paid in the next belongs to the year it is received.

The tax year runs from 6 April to 5 April. A bonus paid on 3 April falls in the earlier tax year. The same bonus paid on 10 April falls in the next one. This is a favourite exam trap.

You can deduct only certain costs from employment income. The general test is that the expense must be incurred wholly, exclusively and necessarily in the performance of the duties. It is a strict test. Travel from home to a permanent workplace is ordinary commuting and is not deductible. Travel to a temporary workplace, or between workplaces for the job, usually is. Clothing, meals and professional fees paid by the employee are not allowed unless they pass the test or a specific rule applies.

Some deductions have their own rules. Employee pension contributions, payroll giving and professional subscriptions are covered under specific provisions. If the employer pays a mileage allowance, compare it with the approved rates. Those rates are 45p per mile for the first 10,000 miles and 25p per mile after that. If the employer pays less than the approved amount, the employee can claim relief for the shortfall. If the employer pays more, the excess is taxable.

Key rules to remember

Receipts basis
Taxable in the tax year in which earnings are received
Received at the earlier of actual payment and entitlement to payment. Directors have extra rules.
General deduction test
Expense must be wholly, exclusively and necessarily incurred in performing the duties
All three words must be met. Commuting to a permanent workplace fails.
Approved mileage allowance (cars)
Up to 10,000 miles: 45p per mile. Over 10,000 miles: 25p per mile
Applies to business miles in the employee's own car. Count miles for the whole tax year.
Mileage allowance comparison
Approved amount − amount paid by employer = deductible shortfall (or taxable excess if negative)
Excess paid over approved rates is taxable. Shortfall can be claimed as a deduction.
Taxable employment income
Salary + bonus + commission + taxable benefits + taxable excess mileage − allowable expenses − allowable deductions
Gross figures are used. Income tax deducted under PAYE is not deducted from earnings.

How to solve Employment Income and Taxable Earnings questions

Use this order for any employment income question. It keeps the dates, the amounts and the deductions separate.

  1. 1Identify the tax year and its dates, 6 April to 5 April.
  2. 2List each item of pay: salary, bonus, commission, overtime and any other cash earnings.
  3. 3Apply the receipts basis to each bonus or payment. Decide which tax year it falls in.
  4. 4Use gross amounts. Ignore tax and National Insurance withheld through PAYE.
  5. 5Test each expense against the wholly, exclusively and necessarily rule, or a specific rule.
  6. 6For mileage, calculate the approved amount, compare it with the amount paid, and treat any excess as taxable.
  7. 7Add taxable benefits if the question includes them, then deduct allowable expenses and pension contributions where relevant.
  8. 8State the total and show your workings clearly for method marks.

Quickest way: Date, gross, test, total

When to use it: Use this in Section A and Section B objective test questions where you have about three minutes per two-mark question.

  1. Underline the payment dates and check them against 5 April.
  2. Write down gross pay only and ignore PAYE deductions.
  3. Cross out any expense that is commuting, private or clothing without a specific rule.
  4. For mileage, compute miles × rate in two bands, then compare with the employer's payment.
  5. Add and subtract once, then check the answer against the options for traps such as including tax withheld.

Common mistakes in Employment Income and Taxable Earnings

  • Taxing a bonus in the year it was earned rather than the year it was received.

    Students think of the accounting accruals basis used for businesses.

    Fix: Employment income uses the receipts basis. Find the date of payment or entitlement, whichever is earlier.

  • Deducting income tax and National Insurance from salary before taxing it.

    The payslip shows take-home pay, which looks like the answer.

    Fix: Start with gross pay. PAYE is a payment on account of the tax, not a deduction from income.

  • Allowing the cost of travel from home to the normal workplace.

    Travel feels like a job cost.

    Fix: Ordinary commuting is private. Only travel to a temporary workplace or between work sites for the job is allowed.

  • Applying 45p to all business miles.

    Students remember only the first rate.

    Fix: Use 45p for the first 10,000 miles and 25p after that, for the whole tax year.

  • Ignoring the excess when the employer pays more than the approved rate.

    Students assume any mileage payment is tax free.

    Fix: Compare the payment with the approved amount. Any excess is taxable employment income.

  • Treating a deduction as allowable because it was helpful to the job.

    The word necessarily is read loosely.

    Fix: The expense must be required to do the job itself, not merely helpful or convenient. Check all three words.

Worked examples

Example 1

Anna is employed on a salary of £42,000 for 2025–26. She was paid a bonus of £4,000 on 2 April 2026 relating to 2025–26 performance, and a bonus of £3,000 on 12 April 2026. She received commission of £2,500 in the year. Calculate her taxable employment income for 2025–26, ignoring benefits.

Show the solution
  1. The tax year 2025–26 ends on 5 April 2026.
  2. The £4,000 bonus was paid on 2 April 2026, so it is received in 2025–26. It is taxable.
  3. The £3,000 bonus was paid on 12 April 2026. It falls in 2026–27, so it is excluded.
  4. Commission of £2,500 was received in the year and is taxable.
  5. Total = £42,000 + £4,000 + £2,500 = £48,500.

Answer: £48,500

Example 2

Ben uses his own car for business travel. In 2025–26 he drove 12,000 business miles. His employer paid him a mileage allowance of 40p per mile. Calculate the taxable amount or the allowable deduction for Ben.

Show the solution
  1. Approved amount: first 10,000 miles × 45p = £4,500.
  2. Remaining 2,000 miles × 25p = £500.
  3. Total approved amount = £4,500 + £500 = £5,000.
  4. Amount paid by employer: 12,000 × 40p = £4,800.
  5. Approved amount exceeds the amount paid by £5,000 − £4,800 = £200.
  6. The shortfall is not taxed. Ben can claim a deduction of £200 against his employment income.

Answer: Ben can deduct £200 from his employment income. No amount is taxable.

Exam tips

  • Read every date in the question and compare it with 5 April before adding any bonus.
  • In objective test questions, the wrong options are usually built from common traps: tax deducted, wrong year or 45p on all miles. Work out your own answer first.
  • In Section C, set out a short computation with labelled lines. Show the mileage calculation separately so you earn method marks even if a figure is wrong.
  • Use the rates given in the tax tables: 45p up to 10,000 miles and 25p above. Do not rely on memory of other rates.
  • When asked whether an expense is deductible, quote the test: wholly, exclusively and necessarily. Then apply it to the facts in one sentence.

Practice questions from Income from employment

Employment Income and Taxable Earnings in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Employment Income and Taxable Earnings: frequently asked questions

What is the receipts basis for employment income?

Earnings are taxed in the tax year in which they are received, not the year in which they are earned. They are treated as received on the earlier of the date of payment and the date of entitlement to payment. Directors are subject to additional rules.

What does wholly, exclusively and necessarily mean?

The expense must be incurred only for the job, with no private purpose, and it must be required in the performance of the duties. All three conditions must be met. Costs that are only helpful or convenient do not qualify.

What are the approved mileage rates for cars?

The approved rates are 45p per mile for the first 10,000 business miles in the tax year and 25p per mile above that. They apply to an employee's own car. Compare the result with what the employer paid.

Is the cost of travelling to work deductible?

Not if you travel to a permanent workplace, because that is ordinary commuting. Travel to a temporary workplace, or between workplaces as part of the job, can be deductible. The facts in the question decide which applies.