Chapter 7 Income tax and NICs Flashcards
2.1 NICs payable
An employee is liable to class 1 primary NICs on cash earnings plus vouchers. Employers are liable to class 1 secondary NICs on cash earnings and vouchers provided to employees, plus Class 1A NICs on any taxable benefits, plus Class 1B NICs on grossed up value of any benefits/expenses covered by PAYE settlement agreement.
Self-employed persons pay class 2 NICs at a flat rate of £3.15 a week and class 4 NICs based on their adjusted trading profits.
2.2 Apprenticeship levy
Payable by employers based on 0.5% of annual pay bill. This comprises all amounts subject to class 1 secondary NICs. A levy allowance of £15,000 means that employers only have a liability if pay bill exceeds £3 million. Funds can be recouped if paying for training or exam costs of apprentices. Payment deductible when calculating employer’s profits for tax purposes.
3.1 Venture capital trusts
A VCT is a company quoted on the UK stock exchange and approved by HMRC. Income is derived wholly or mainly from shares and securities in unquoted trading companies. The company must have fewer than 250 full-time employees and must have raised no more than £5m under EIS and VCT schemes in the previous 12 months (£10m for knowledge intensive companies – created IP which is used for its main business activity or employs a high proportion (20%) of skilled employees engaged in R+D).
A qualifying individual is over 18 and subscribing for newly issued shares.
- 30% of the amount invested up to £200,000 per tax year is deducted in arriving at IT liability, relief only available in the tax year of investment. Can only reduce IT liability to £nil.
- Only the first £200,000 will qualify for relief under the scheme.
- Income tax relief is withdrawn if the shares are sold within 5 years by bringing it back into charge the year relief was originally given.
- Dividends are received tax free if they relate to the first £200,000 invested (regardless of length of ownership)
- Gains on disposal of VCT shares are exempt and losses not allowed (regardless of length of ownership)
3.2 EIS
A qualifying company is a UK unquoted company carrying on a qualifying trade, is not under the control of another company. Does not control any other companies other than qualifying subsidiaries (EIS company owns more than 50%, this is increased to 90% if the subsidiaries trade is property or land management). The gross asset value before the share issue does not exceed £15m and £16m after the issue (including subsidiaries), the company has less than 250 full-time employees at the date of issue (500 for knowledge intensive companies), the company has not raised more than £5 million in the last 12 months (£10m for knowledge intensive companies) and not more than £12m total (£20m for knowledge intensive). The first funds raised by a share issue under EIS or VCT must have been within 7 years of the first commercial sale and is not in financial difficulty.
A qualifying individual must be unconnected to the company, the individual and their associates should not be employed by the company or a director and the individual with associates does not hold more than 30% of the issued share capital or voting rights. The conditions apply for a period of two years prior to the share issue and three years after.
The relief is:
- 30% of amount subscribed deducting in arriving at IT liability, can only reduce to £nil.
- Maximum investment is £1,000,000 in a tax year (double for knowledge intensive)
- Relief given in tax year of purchase, but can be carried back to previous year, subject to maximum limit for that year.
- Relief withdrawn if shares sold within three years, relief withdrawn by way of an assessment in the year the relief was originally obtained.
- Unlike the VCT scheme, dividends received on EIS shares are fully taxable as normal.
- Gains on shares arising after a three-year holding period are not chargeable. Capital losses are always allowed. A capital loss can be offset against total income in the year of loss and/or the preceding year.
- In calculating a capital loss, the cost of the shares in the calculation is reduced by the amount of EIS investment relief if it has not been clawed back.
3.3 EIS – reinvestment relief
The investor must be UK resident at the time the gain is realised and when the shares were purchased. If any chargeable asset is sold and the proceeds reinvested in EIS shares the gain arising on the original asset can be deferred. Reinvestment must be made 12 months before the date of disposal and up to three years after.
Maximum EIS deferral relief is lower of the amount of gain on old asset and subscription cost of new EIS shares. Can claim a lower amount to utilise AEA and losses. Deferred gain arises at earlier of sale of EIS shares, or if within three years of making the investment, the individual stops being resident in UK and if within three years of making the investment, the shares cease to be qualifying shares or the company ceases to be a qualifying company.
Where the original disposal would have been eligible for BADR then this can be claimed on the deferred gain when it is charged to tax.
3.4 SEIS
A qualifying company is a UK unquoted trading company, is not under the control of another company. Does not own non qualifying subsidiaries, not in financial difficulty. The company’s trade must be new (carried on for less than two years before share issue), gross asset value before the share issue (less than £200k), fewer than 25 full time employees at date of issue, not previously raised funds through EIS or VCT schemes or raised more than £150,000 (in total in the previous 3 years) through SEIS and funds raised under SEIS must be invested in its new qualifying trade within three years of the share issue.
A qualifying individual is unconnected to the company and the investor need not to be UK resident for income tax relief purposes.
Tax relief is:
- 50% of amount of subscribed in arriving at IT liability, can only reduce to £nil.
- Maximum investment is £100,000 per tax year.
- Can claim to carry back relief to previous tax year.
- No relief available until the company has spent at least 70% of the funds invested or trade has carried on for four months.
- Relief withdrawn if shares sold within three years.
- Relief withdrawn by bringing the IT back into charge in the tax year of original relief.
- Dividends received are fully taxable as normal.
- Gains after 3 years are not chargeable for CGT, capital losses allowed capital loss on the shares can be offset against general income in the year of loss and/or the preceding year.
- In calculating a capital loss, the cost of the shares in the calculation is reduced by the amount of SEIS income tax relief if it has not been clawed back.
3.5 SEIS reinvestment relief
If any chargeable asset is sold and proceeds reinvested in SEIS shares in the same year, the gain is exempt. Maximum SEIS exemption is 50% of the lower of the amount of gain and the subscription cost of new SEIS shares (max 50% x 100,000).
If an election is made to treat a SEIS investment as made in the previous year for IT purposes, the investment is also treated as being made in that year for SEIS reinvestment relief. EIS deferral relief and SEIS reinvestment relief cannot be claimed on the same expenditure.
If the SEIS shares are sold within three years, the reinvestment relief will be withdrawn, and an adjustment will be made to the original capital gains computation.
4.1 ISAs
All income from ISA is exempt and disposals are exempt from CGT. Different ISAs include:
- Cash ISAs: investment in cash or cash like equity products
- Stocks and shares ISAs: investment is in qualifying stocks, shares and insurance products.
- Innovative finance ISA: peer-to-peer lending through approved websites
- Lifetime ISA: buy first home or at the age of 60. Must be under 40 to open and can invest until the age of 50.
ISA limits are £20,000 per tax year, can be split between ISAs, but can only pay into one of each type of ISA in the year. Individuals aged 16 and 17 can only invest up to £20,000 in a cash ISA only. Once a lifetime ISA has been set up, the taxpayer can contribute up to £4,000 a year and receive a 25% bonus from the government.
4.2 Junior ISAs
- Anyone under 18 can hold up to one cash and one stocks and shares Junior ISA at any time.
- The annual limit for contributions to Junior ISAs is a combined total of £9,000 in 2022/23
- Funds invested are locked until the child reaches 18, then the ISA becomes an adult ISA and funds can be withdrawn without losing the tax exemption.
