Ch.10 - Employee remuneration

Question 1

What is the tax treatment of termination payments?

Answer 1

Employer:

• allowable deduction while trading
• on cessation, maximum allowed is statutory redundancy plus 3*statutory redundancy

Employee:

1. shock (death or injury) - tax free
2. suprise (ex gratia) - first £30k tax free, remainder taxable; exempt from NIC
3. contractual/expected - taxable as employment income at highest marginal rate (on receipt basis)

Question 2

What is tax treatment of statutory redundancy pay?

Answer 2

• fully exempt, however counts towards £30k exemption

Question 3

What is tax treatment of payments in lieu of notice (PILON)?

Answer 3

• if contractual, fully taxable
• if uncontractual, from April 2018 does not count towards £30k exemption
• should be taxed as general earnings, not counted as part of termination payment

Question 4

What is tax treatment of benefits rec’d after termination of employment?

Answer 4

• taxed as surprise termination payments
• normal rules to calculate the benefit
• retraining, counselling or outplacement services are exempt

Question 5

What are 4 main types of tax-advantaged share schemes?

Answer 5

• company shares option plans (CSOP)
• enterprise management incentive (EMI)
• save as you earn (SAYE)
• share inventive plan (SIP) - does not involve options, however tax efficient way of providing shares to e’es

Question 6

What are employee tax liabilities under not tax-advantaged share schemes?

Answer 6

1. grant - no tax
2. exercise
   - taxed as part of employment income (MV @ exercise less cost [cost of shares plus cost paid for options] = employment income)
3. sale
   - capital gain (proceeds less MV @ exercise)

Question 7

What are employee tax liabilities under tax-advantaged share schemes?

Answer 7

1. grant - no tax
2. exercise - normally not taxable
3. sale
   - capital gain (proceeds less cost{cost of shares plus cost paid for options])

Question 8

What are advantages of tax-advantaged share schemes?

Answer 8

• no NIC payable
• all increases in value are charges under CGT (rates are lower than under IT)
• availability of ER (although there are some exceptions)
  => with respect to shares acquired after 6 April 2013 (2012 by election), EMI doesn’t require 5% holding in the company and one year had to pass since date of grant, not exercising the option

Question 9

What are tax implications of share options for employers?

Answer 9

• deductible expense which is the difference between MV @ exercise and actual price paid by e’es

Question 10

Explain the treatment of Share Incentive Plans (SIPs)?

Answer 10

• enables the issue of free shares and/or purhcase of shares by e’es out of gross pay
• shares are held in trust for the e’es (rather than personally)
• 4 ways of issue of shares:
  a) free shares (e’r can gift up to £3.6k worth of shares each year)
  b) partnership shares (e’e to buy partnership shares out of pre-tax remuneration up to the lower of £1.8k or 10% of annual salary)
  c) matching shares (e’e may choose to issue further free shares on a 2:1 basis to the partnership shares)
  d) dividend shares (e’e can use dividends rec’d from the plan to reinvest in further plan shares)

Question 11

What are e’es tax liabilities under SIP?

Answer 11

Income tax and NIC:

• relevant period < 3 years (time between company allocating shares to e’e and plan giving shares to e’e) - IT and NIC payable based on MV @ withdrawal (for dividend shares, the original dividend is taxable)
• relevant period = 3-5 years - IT and NIC payable on lower of:
  a) MV @ withdrawal
  b) MV @ grant
  
  • > dividend shares may be removed with no IT or NIC payable
• relevant period > 5 years - no taxable benefit

CGT:
- base cost is equal to MV @ withdrawal

Question 12

What are advantages of pension schemes?

Answer 12

• funds contributed grow tax free (pension schemes do not have to pay IT or CGT)
• tax relief for e’e as well as e’r
• relief for e’e depends on type of scheme:
  a) OPS - deducted from employment income gross
  b) PPS - made net of basic rate of tax, e’e can extend their BRB and HRB by gross amount

Question 13

What is the tax treatment of annual allowance for pension schemes?

Answer 13

• annual allowance is £40k and can be increase by any unused allowances from the previous 3 years
• tapered for high income earners (same way as PA), i.e. treshold income > £110k or adjusted income > £150k
  
  • > treshold income = net income less gross PPS contributions paid by e’e
  • > adjusted income = net income plus e’e OPS contributions and all e’r contributions
• minimum allowance is £10k

Question 14

What is tax treatment of annual allowance charge?

Answer 14

• AA charge arises if total gross pension contributions from all sources are over AA
• it effectively removes the relief given on excess contributions
• excess contributions are:
  a) taxed as extra income after dividends @ highest marginal rate as NSI
  b) AA charge is added to IT liability, not income tax computation (it does not affect calculation of ANI for purposes of restricted PA)

Question 15

Explain the traits of small self administered schemes (SSAS).

Answer 15

• aimed at smaller companies
• rules are same as for normal OPS
• benefits:
  a) SSAS can borrown up to 50% of fund value
  b) it can lend up to 50% of fund value to its own company
  c) it can invest less than 5% of fund value in its own shares (not able to invest in residential property (unless REIT) or in tangible moveable property

Question 16

Explain the traits of self invested pension plan (SIPP)?

Answer 16

• subject to same rules as any other PPS
• can borrow up to 50% of fund value, but not able to lend money
• may purchase any amount of shares in any company
• not able to invest in residential property (unless REIT) or in tangible moveable property

Question 17

What are common uses of SSAS or SIPP?

Answer 17

• most common use is to hold commercial property being used in the business of the sponsoring company (SSAS) or pension investor (SIPP)
• such property will usually be leased to and used in the usiness of those companies
• tax advantages:
  a) business pays rent that is tax deductible
  b) pension fund doesn’t pay IT or CGT on rental income/lease premium rec’d
  c) no CGT on disposal of the property by SSAS or SIPP