Income Tax (Earnings and Pensions) Act 2003 section 218

Calculation of earnings rate for a tax year

Section 218 explains how to calculate the annual earnings rate for an employment, which is the key figure used to determine whether an employment is lower-paid.

• The earnings rate is calculated using a three-step method: first total the earnings and cash equivalents of benefits, then add any extra amount for car provision, and finally subtract authorised deductions.
• When performing the calculation, you must assume the employment is not lower-paid, so that the cash equivalents of all relevant benefits (including those that would only apply to higher-paid employees) are included in the total.
• Authorised deductions that may be subtracted include only those specifically permitted — the legislation lists allowable deductions rather than listing prohibited ones.
• Special rules apply where the benefits in question involve the provision of living accommodation, and separate rules govern extra amounts to be added for the provision of a car.