Employment Income Flashcards
What is the employment allowance of £4,000, with regards to Employers Class 1 NIC?
The 1st £4,000 of employers class 1 NIC does not need to be paid.
The allowance is not available if the director is the sole employee or where the employers contribution are more than £100k for the previous tax year.
With regards to IR 35 what is a typical employer to employee scenario?
Employer pays salary Employer pays class 1/1A Employer NIC Worker is paid salary Worker pays income tax Worker pays NIC 1 employee
With regards to IR35 what is the typical employer to contractor relationship?
Employer pays fee to consultant
Employer pays no NIC on the fee.
Contractor receives fee via their personal company.
Corporation tax is charged on profits.
Profits are extracted via dividends.
No employee NIC as profits extracted via dividends.
What are the factors that need to be considered when determining if an individual is employed vs self employed?
Contract of services
Control of work
Provision of own equipment (provide own laptop)
Hire helpers
Financial risk (holiday pay and sick pay)
Integral position
Opportunity to profit
Number of employers (multiple employers indicates contractor)
How is a deemed salary treated with regards to IR35?
The employee will pay income tax and NIC employee 1 on the deemed salary.
The employer is allowed to treat the deemed salary as an allowable expense and they must also pay employer NIC 1 on the deemed salary.
What termination payments are fully exempt from income tax and NIC?
Death and injury payments
Approved lump sum on retirement
Legal costs recovered by employee from employer regarding legal action to recover compensation for loss of employment
Which termination payments are NOT exempt from income tax and NIC?
Terminal bonuses and golden handshakes
PILON (payment in lieu of notice)
PENP (post employment notice pay)
Which termination payments are partially subject to income tax and national insurance?
Ex gratia payments
Any benefits after termination
Payments in respect of notice period
1st £30,000 is received tax free and then excess is taxed under top slice of non savings income.
What are the differences between tax advantaged and non tax advantaged share schemes?
Non tax advantaged share scheme:
No tax payable on grant
Exercise:
Pay income tax on MV at exercise less exercise price.
Disposal:
CGT
Proceeds less MV at exercise, then tax the gain via CGT.
Tax advantaged scheme:
No tax on grant or exercise.
Disposal:
Proceeds less cost at exercise, then tax the gain via CGT.
What are the main differences between non tax advantaged schemes and tax advantaged schemes?
With non tax advantaged schemes you get taxed with income tax and CGT. With tax advantaged schemes you only get taxed on CGT.
There is also a cashflow advantage with the tax advantaged share scheme i.e. you do not have to pay income tax on the shares.
AEA is available and CGT rates are lower.
What is an SAYE scheme?
Employee is invited to scheme where they pay £5 to £500 a month for a fixed period of 3 to 5 years, from their salary.
Cash that has been deducted accrues interest and this tax free.
At the end of the period employee has the option to withdraw cash or to exercise options at previously set option price.
(No income tax and no national insurance when the share options are granted or exercised)
There is no income tax or insurance if the employee chooses to take the cash
What is a CSOP (Company Share Option Plan)?
A CSOP can be restricted to selected employees and full time directors.
An employee can be granted options to buy shares up to the value of £30,000 (at the date of grant)
Options must be exercised between 3 and 10 years from grant to achieve the beneficial tax treatment.
What is an enterprise management incentive scheme?
Is created to incentivise key employees who invest their time into small high risk companies.
A qualifying company can grant employees options over shares up to £250,000, subject to a maximum £3,000,000 in total.
Company needs to have gross assets not exceeding £30mn and must have less than 250 full time equivalent employees when the options are granted.
Any one employee can only hold options of shares up to a maximum of £250,000 at any one time.
The company may set a target to be achieved before an option can be exercised. The target must clearly be defined at the time the option is granted.
Options can be granted at a discount below market value, but there is a tax consequence for this.
Provided the conditions are met then:
No income or national insurance on grant
No income tax or national insurance on exercise unless exercise price is given at a discount to market value at grant ( income tax charge on the lower of the discount or the difference between market value and exercise price paid)
What is a share incentive plan (SIP)?
A company sets up a trust and buys shares on behalf of employees.
SIP’s differ from the other schemes because employees are given shares instead of options to buy shares.
All full time and part time employees must be eligible to participate in the scheme.
Free shares can be given up to £3600 per year to each employee.
The employee can purchase partnership shares at any time in the year. The amount to be deducted paid is deducted from the employees pre tax- salary up to the lower of £1800 and 10% of salary in any tax year.
The employer can also award matching shares free to employees who purchase partnership shares at a maximum ratio of 2:1
Dividends on the shares in the SIP are tax free if the dividends are used to buy more shares.
