Employment Income Flashcards
State the factors of employment or self-employment
Indicators of employment:
- Obligation to work
- Employer controls manner and method
- Sick pay/ holiday pay
- Specified number of hours
- Equipment provided
- obliged to work exclusively and personally for employer
What is the proforma for calculating employment income?
Salary/ Bonus
Benefits
Private Expenses reimbursed
Cash Vouchers
Less: Allowable expenditure OPS Professional subscriptions Mileage allowance (42p/25p) Business Expenditure Shares in a SIP (max 10% salary)
Add:
Redundancy payments
Less: Exemption (30k)
Add: Non tax advantaged share option scheme
Employment income
What basis do we calculate employment income under?
On a receipt basis.
The earlier of:
- Actual payments
- Becoming entitled to such payment
State the allowable deductions for employment income
General Rule: Wholly Exclusively and necessarily in the performance of duties
- Employee contributions to Occupational Pension Schemes
- Fees/ Subscriptions to professional bodies
- Payments to Charity (payroll deduction scheme)
- Expenditure on work travel
- Capital Allowances
State the Exempt Benefits
- Employer contributions to a registered pension scheme
- Pension advice up to £500
- Subsidised canteen available to all employees
- Car parking space
- One mobile phone
- Work related training
- Sporting facilities available to employees and not to general public
- Welfare counciling
- Staff parties ( up to £150 pp)
- Workplace nursuries
- Relocation expenses paid/reimbursed up to £8k.
- Job related accommodation
- Overnight expenses £5 a night in UK £10 overseas
- Loans > £10,000
- Employer contributions towards household costs where employee works at home
- Home worker expenses up to £6 a week
- Medical treatment up to £500 a year to enable an employee to return to work.
- Trivial Benefits which cost > £50 (not cash)
- Long service awards in kind (if employed for 20+ years (£50.)
How would we calculate living accommodation benefit?
- Basic Charge:
Lower of:
a) Annual Value
b) Rent paid by employer
- Additional expensive charge (if property is owner by employer and costs > £75k)
(Cost - £75,000) x ORI (2%)
If owned for more than 6 year - MV when first provided to employee including subsequent capital improvements.
How do you calculate the motor car benefit?
Benefit = Appropriate % x list price
List Price plus costs of extras/accessories l
Less capital contributions by employee (max £5k)
How do you calculate the fuel benefit?
Appropriate % x £24,600
Ignore partial contributions by employees.
How do you calculate the van benefit?
Private use: £3,500
Private Fuel: £669
If unavailable for > 30 days - time apportion.
How do you calculate the loan benefit?
if exceeds £10,000
Average method = opening + closing /2
Strict method - Balance x ORI on a daily basis
Benefit:
Interest that should be paid x
Interest that has been paid (x)
Benefit
State the tax implications of share options if approved
Grant: No tax implications
Exercise: No tax implications
Disposal: Capital gains arises
Sale proceeds x
Admin cost. (X)
Cost of shares (x)
Gain
Business asset disposal relief will be available if:
company is trading
Employee owns >5% of OSC and
Has owned shares for at least 2 years
State the tax implications of share options if unapproved
Grant: No tax implications
Exercise: Employment income - IT on benefit
State the tax implications of share options if unapproved
Grant: No tax implications
Exercise: Employment income - IT on benefit MV at exercise date x admin. (x) cost of shares (x) Employment income x
Class 1a NIC charge if shares readily convertible to cash (unless quoted) If quoted class 1 would be calculated
What are the tax advantaged share option schemes?
Save as you Earn (SAYE)
Company share option plan (CSOP)
Enterprise management incentives (EMI)
How does as SAYE scheme operate?
Employees save and then use the funds to pay for share or take the cash
What are the conditions of a SAYE scheme?
- Available to all e’ees
- E’ee contributes fixed monthly amount up to max of £500 to SAYE contract
- Investment made for 3 to 5 years
- Exercise price must be at least 80% of the MV at the date of grant.
What is the tax impact of an SAYE at grant, exercise and sale?
Grant - No IT and No NIC
Exercise: No IT and no NIC
Sale: CGT
How does a company share option scheme operate?
An employee is granted options to buy shares
What are the conditions for a Company Share Option Scheme?
- Fully time directors (> 25 hr pw) and employees are eligible subject to companies discretion.
- E’ees with material interest (> 30%) in a close company are ineligible.
- Max value of shares over which unexercised options held = £30,000 per employee (valued at grant)
- Exercise between 3 and 10 years from grant.
- Issue price must be MV at date of grant.
What is the tax impact of company share option scheme at grant, exercise and sale?
Grant: No IT & No NIC
Exercise: No IT & No NIC
Sale: CGT
How does an Enterprise Management Incentive scheme operate? (EMI)
An employee is granted options to buy shares
What are the conditions of an EMI?
- E’ees are selected (Discretionary)
- Max value of options that can be granted £3m (scheme limit)
- Max value of shares over which unexercised options jeld = £250,000 per E’ee (valued at grant inc CSOP)
- Exercise within 10 years
- Exercise price ideally at MV so no implications on exercise
Company conditions
- Must have < 250 full time employee’s
- Must be a qualifying trading company
- Gross assets > £30m
- Not a 51% subsidiary or controlled by another company.
- E’ee mustwork for the company for > 25hrs pw or 75%+ of working time.
- No Material interest (>30%)
What is a share incentive plan? (SIP)
It allows employers to give employees shares in the company/ employees to acquire shares without an income tax charge.
How does a share incentive plan work? (SIP)
- Employees are awarded free shares by the company - Max £3,600 per annum (no IT/NIC charge)
- The employee can purchase shares
Max: Lower of:
£1,800 and 10% salary
Cost deducted from pre tax salary
- Company can award matching shares
Max 2 per partnership share
Employee can use dividends to buy new shares.
No IT or NIC charge
What are the conditions of a SIP and the consequences of its withdrawal?
Must be available to all employees
- After 5 years there are no IT/NIC consequences
Within 3-5 years > Dividends remain tax free;
Other shares - lower of:
* initial value
* MV at withdrawal
Charged to IT/NIC
within 3 years:
- Dividends used to acquire shares are taxable
- Other shares IT/NIC payable at withdrawal.
How is CGT calculated on the sale of SIP shares?
Proceeds less base cost which is MV on withdrawal of the scheme.
What are the tax implications for lump sum payments?
They may be exempt, partially Exempt (ex gratia) or wholly chargeable.
Paid net of PAYE if pre P45
Paid net of 20%/40%/45% if post P45
Top slice income
Which lump sum payments are exempt?
Payments due to:
> Injury
>Disability
> Accidental Death
- Statutory redundacy
- Lump sum payments from a registered pension scheme
- Retraining, counselling or outplacement services.
What is a partially exempt lump sum payment and what are the tax implications?
Ex gracia (ie non contractual)
Compensation for loss of office, including benefits as part of termination package.
The first 30k is exempt but this is reduced by any statutory payments,
Excess over the 30K exemption is subject to Class 1a NIC only (payable by employer)
What is a wholly chargeable lump sum payment and what are the tax implications?
Any payment which is contractual such as:
Payments in lieu of notice Restrictive covenants Gardening leave Bonuses Usual Employer practice
Normal PILONS are contractual and therefore subject to IT and Class 1 NICs as normal.
There is a non contractual Payment in Lieu of Notice. (PILONS). What are the rules?
Amount which would have been received if notice period worked > Subject to IT/Class 1 NICs in Full
Excess balance - Eligible of £30,000 exemption with any amount in excess of the exemption subject to IT and Class 1A NICs.
