Advanced Taxation (UK) · Income tax: income from employment

Taxable Earnings and the Employment Income Receipts Basis

Updated 11 October 2026 · Fact-checked

Taxable earnings are the money and money's worth an employee gets from an employment, taxed when received under the receipts basis. You find the earnings, apply the receipt date rules, deduct only allowable expenses, then put the net figure into the income tax computation at the rates in the ACCA tax tables.

Understand Taxable Earnings and Employment Income Basis

Employment income is taxed under the earnings rules. Taxable earnings include salary, wages, bonuses, commissions, tips and most benefits. They cover both money and money's worth, such as a gift of an asset that can be turned into cash. Benefits in kind are taxed as earnings too, but their valuation is a separate topic.

The receipts basis decides which tax year the earnings fall into. Earnings are taxed in the year they are received, not the year they are earned. For money, the receipt date depends on who is paid.

Non-directors are taxed at the earlier of the date payment is made and the date the employee becomes entitled to payment.
Directors are taxed at the earliest of: the date payment is made; the date of entitlement; the date the amount is credited in the company accounts; the date the amount is determined, if it is determined during the period; and the end of the period, if the amount was determined before the end of the period.

Pay that falls on a date in 2025/26 goes in 2025/26 even if it was earned for work in an earlier year.

Now think about deductions. Employment income is not taxed on profit like a business. You may deduct an expense only if the law lets you. The main test is that the cost is incurred wholly, exclusively and necessarily in the performance of the duties. This test is very strict. It is not enough that the expense helps the employer or that the employer expects it. The cost must be one that any holder of the job would have to incur.

Some deductions have their own rules. Examples include contributions to an employer's occupational pension scheme that operates a net pay arrangement (deducted from earnings; contributions to relief-at-source schemes are not deducted from earnings), payroll giving to charity, professional subscriptions on an approved list, and travel in the performance of duties or to a temporary workplace. Normal commuting to a permanent workplace is not deductible. Where the employer reimburses a genuine business cost, there is usually no taxable amount, because the employee is not gaining.

The result is net taxable earnings. This is a non-savings income figure. It then goes into the computation with the personal allowance and the basic, higher and additional rate bands from the tax tables. Class 1 NIC is a separate calculation and is not deducted from earnings.

Key rules to remember

Taxable earnings: Taxable earnings = Salary + bonuses + commission + other cash + money's worth + taxable benefits; Gross amounts, before PAYE deducted. Tax deducted at source is a credit, not a deduction.
Net taxable earnings: Net taxable earnings = Taxable earnings − allowable deductions; Deductions include employee pension contributions only where the scheme operates a net pay arrangement (not relief-at-source schemes), payroll giving, and qualifying expenses.
General expenses test: Wholly + Exclusively + Necessarily, incurred in the performance of the duties; All three must be met. A mixed-purpose cost fails the exclusivity limb.
Receipts basis date (non-director): Earlier of: date of payment; date entitlement arises; Taxed in the tax year (6 April to 5 April) containing that date.
Receipts basis date (director): Earliest of: payment; entitlement; credited in the accounts; amount determined (if determined during the period); end of the period (if the amount was determined before the period end); Extra dates apply to directors generally, including directors of small or private companies.
Employee NIC bands: Class 1 employee: £12,570 nil; £12,571 to £50,270 at 8%; above £50,270 at 2%; From the tax tables. NIC is separate from income tax.
Income tax normal rates: 20% to £37,700; 40% to £125,140; 45% above; Applies to employment income as non-savings income.

How to solve Taxable Earnings and Employment Income Basis questions

Use this method for any question that asks you to compute or explain taxable employment income.

1List every payment and benefit the employee got. Include salary, bonus, commission, tips, gifts and any reimbursements.
2Decide which items are earnings and which are not. A payment for the job is earnings. A genuine reimbursement of business cost is usually not.
3Fix the receipt date of each item and put it in the right tax year. Check for director rules.
4Take off allowable deductions. Test each expense against wholly, exclusively and necessarily, and check for specific reliefs such as pension and payroll giving.
5Total the net taxable earnings. Show each line so you pick up method marks.
6Place the figure in the income tax computation and apply the personal allowance and rates from the tax tables.
7Add any comment the requirement asks for. Examples are advice on a disallowed cost or the effect of timing a bonus.

Quickest way: Receipt date and deduction filter

When to use it: Use this when the question gives a list of payments and costs, and time is short.

Draw two columns: in the year, not in the year. Sort each payment by its receipt date first.
Strike out any cost with private or commuting elements.
Add the in-year items. Subtract only the costs that survive the filter.
Show a short note beside each rejected item giving the reason. Examiners reward the reasoning.

Common mistakes in Taxable Earnings and Employment Income Basis

Taxing pay in the year it was earned
Students are used to the accruals basis from financial accounting.
Fix: Always find the receipt date. The earliest of payment and entitlement fixes the year.
Deducting commuting or home-to-office travel
The cost feels necessary for the job.
Fix: Travel to a permanent workplace is ordinary commuting and is not deductible. Only travel in the performance of duties or to a temporary workplace qualifies.
Treating a cost as allowable because the employer benefits
Students read 'necessarily' loosely.
Fix: The cost must be one that the duties themselves require, and it must not have any private purpose. A mixed cost fails.
Deducting income tax or NIC paid from earnings
Confusion between gross and net pay.
Fix: Start from gross pay. PAYE is a credit against the tax liability. NIC is not an income tax deduction.
Missing the director's earlier receipt dates
The extra dates are easy to forget.
Fix: For directors, check whether the amount was credited in the accounts or determined before it was paid.
Taxing a reimbursed business cost
Students treat all employer payments as earnings.
Fix: If the employer repays a genuine, deductible business cost, there is normally no taxable amount. If the cost would not be deductible, the repayment is taxable.

Worked examples

Example 1

Tara is an employee, not a director. In 2025/26 she received a salary of £48,000. She was also paid a bonus of £6,000 on 10 April 2025 for work done in 2024/25. She was told on 20 March 2026 that she is entitled to a bonus of £4,000 for 2025/26, payable on 15 May 2026. She contributes £2,400 to her employer's occupational pension scheme under a net pay arrangement, and pays £500 for a subscription that is not on an approved list. Compute her net taxable earnings for 2025/26.

Show the solution

Salary received in the year: £48,000.
Bonus paid 10 April 2025: the receipt date is within 2025/26, so it is taxed in 2025/26 even though it was earned in 2024/25. Include £6,000.
Bonus of £4,000: entitlement arose on 20 March 2026, which is before payment and falls in 2025/26. For a non-director, the earlier of payment and entitlement is the receipt date, so include £4,000 in 2025/26.
Total taxable earnings: £48,000 + £6,000 + £4,000 = £58,000.
Deduct the pension contribution £2,400 under net pay arrangement.
The £500 subscription is not on the approved list, so it is not deductible.
Net taxable earnings: £58,000 − £2,400 = £55,600.

Answer: Net taxable earnings for 2025/26 are £55,600.

Example 2

Raj is an employee and has a permanent office in Leeds. In 2025/26 his gross salary was £70,000. He travelled from home to the Leeds office each day at a cost of £1,800, and made a client visit to Manchester that cost £320 for rail fares. His employer repaid the £320 and did not repay the commuting cost. Compute his income tax on employment income, ignoring NIC and any other income, and assume PAYE has not been considered.

Show the solution

Gross salary: £70,000. This is taxable earnings.
The £320 repayment is a reimbursement of travel in the performance of duties. The cost would be deductible, so there is no taxable amount. Do not add it.
The £1,800 commuting cost is ordinary commuting to a permanent workplace, so it is not deductible.
Net taxable earnings: £70,000.
Personal allowance: income is below £100,000, so the full £12,570 applies.
Taxable income: £70,000 − £12,570 = £57,430.
Basic rate band: £37,700 × 20% = £7,540.
Higher rate: £57,430 − £37,700 = £19,730 × 40% = £7,892.
Total income tax: £7,540 + £7,892 = £15,432.

Answer: Raj's income tax liability is £15,432.

Exam tips

Write the receipt date for each payment beside it. Many marks hang on putting items in the right year.
When rejecting an expense, name the failing limb of the test: not wholly, not exclusively or not necessarily. One short phrase is enough.
Use the tax tables given in the exam for rates and bands. Do not rely on memory for figures.
Show every working line. The supplementary instructions say all workings should be shown, and nearest £ is enough.
If the scenario involves a director, check the extra receipt dates before you decide the tax year.

Practice questions from Income tax: income from employment

Taxable Earnings and Employment Income Basis in other exams

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

ACCA Applied SkillsEmployment Income and Taxable Earnings

Taxable Earnings and Employment Income Basis: 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 they are earned. For most employees the receipt date is the earlier of payment and the date they become entitled to the money. Directors have further dates to check.

What does wholly, exclusively and necessarily mean?

The cost must be incurred only for the job, with no private purpose, and in the performance of the duties. It must be something every holder of the post would have to bear. The test is strict and is why most everyday employee costs are not deductible.

Can an employee deduct commuting costs?

No, travel between home and a permanent workplace is ordinary commuting and is not deductible. Travel in the performance of duties, or to a temporary workplace, can qualify.

Is employee NIC deducted from taxable earnings?

No. Class 1 NIC is calculated separately using the bands in the tax tables. It does not reduce taxable earnings for income tax.