Employment Income Flashcards
Employee (class 1) NI
Calculated on: Cash earnings over £9,568
Rate: 12% up to UEL, 2% if above UEL
Limits: UEL (£50,270)
Paid by: Employer, suffered by the employe e
Employer (class 1) NI
Calculated on: Cash earnings over £8,840
Rate: 13.8%
Limits: N/A
Paid by: Employer.
Employment allowance of £4k
- Not available to companies where the
the director is a sole trader.
- Where the employer’s contributions are
£100k or more for the previous tax year.
Employer (class 1) NI
Calculated on: Cash earnings over £8,840
Rate: 13.8%
Limits: N/A
Paid by: Employer.
Employment allowance of £4k
- Not available to companies where the
the director is a sole trader.
- Where the employer’s contributions are
£100k or more for the previous tax year.
Employer (Class 1A) NI
Calculated on: Benefits
Rate: 13.8%
Limits: N/A
Paid by: Employer
Personal service companies (IR35)
The name that is given to a company caught by anti-avoidance legislation that catches those who have set up companies to offer their services rather than to be employed.
Employed vs self-employed factors (8 factors).
- Contract of services
- Control of work
- Provision of own equipment
- Hire helpers
- Financial risk
- Integral position
- Opportunity to profit
- Number of employees
Deemed salary
This is what will be taxed as opposed to dividends received from PSC. Individuals will have to pay both income tax and Class 1 employee NIC.
IR35 to a small company
As involved with small companies, it is the PSCs’ responsibility to deduct PAYE taxes on deemed employment income.
Deemed salary is taxed as if paid to an individual in the last year.
PSC to medium/large organisations.
Client rather than PSC decided whether IR35 applies.
Process:
Process:
1) The client will issue an SDS, Status Determination Statement, to the individual and PSC advising whether IR35 applies.
2) Individual dis/agrees with SDS. If they disagree, they can challenge the client and therefore a process will have to be in place.
3) Client will lead discussions regarding SDS.
4) Client considers status determination. There is a 45-day time limit following the client receiving individuals challenge.
If IR35 applies, the client is required to pay income tax and NIC on ‘deemed direct payment (DDP)’.
DDP calculation
Payment in respect of services
Less: direct costs of materials incurred by PSC
Less: deductible employee expenses incurred by PSC
= DDP
Deemed salary
Income from relevant enagagements
Less: 5% statutory deduction
Less: Salary/benefits paid to worker
Less: employers NIC on actual payments
Less: Expenses allowable under employment income
Gross amount of deemed payment
Employers NIC on gross deemed payment [G x 13.8/113.8]
Actual deemed payment to worker
Termination payments (1)
- For death, injury and disability
- Approved lump sum on retirement
- Legal costs recovered by employee from employer following legal action
Fully exempt from IT and NIC
Termination payments (2)
- Payment as reward for services
- compensation for loss of office which is contractual or reasonable expectation of payment
-post emplpyment notice (PENP).
Taxed in year of receipt as normal employment income with Class 1.
Termination payments (3)
- Other ex-gratia payments such as compensation for loss of office (non contractual and no expectation)
-Any benefits (car) after termination
-Sompe payments in respect of notice period
First £30k received tax free (IT and NIC)
If statutory redundancy pay is received, this reduced the £30k exemption available.
Class 1A NIC will be due on the excess
Payments in respect of notice period
1) Required to work notice period until termination of contract
[taxed as normal employment income - IT and Class 1 NIC]
2) Place employee on gardening leave
[taxed as normal employment income - IT and Class 1 NIC]
3) Terminate employment during notice period. Payment made at point of termination.
PENP (post employment notice pay)
Taxed as normal employment income - IT and Class 1 NIC
Non-PENP
Treated as termination payment subject to £30k rules.
Share schemes
If an employee is sold shares at less than market price, they are treated as receiving specofiic employment income.
No IT, only lower rate of CGT for tax-advantaged share schemes.
1) Save as you earn share scheme
1) Regular monthly amount of a period of 3-5 years
2) Accoint receives tax free bonus
3) Choice: take cash or exericse option and buy shares.
4) sell shares if exercised second option.
If conditions met:
- No IT or NIC when share options are granted/exercixed.
- On sale of shares, any gain is subject to CGT.
- No IT or NIC employee chooses to take cash.
Company share option plan (CSOP).
1) Can be restricted to selected employees and full-time directors.
2) Options must be exercised between 3-10 years from grant.
3) An employee can be granted options over shares up to a value of £30k.
Provided conditions are met:
- There is no IT or NIC on grant or exercise of option
- on sale of the shares any gain is subject to CGT. The cost of the shares is option price paid.
EMI (Enterprise management incentives)
Scheme for smaller, higher risk employees to retain employees. Company chooses whose eligible for this scheme.
Co. must have gross assets not exceed £30m and must have less than 250 employees.
1) Co. can grant shares upto £250k at the time of the grant, subject ot a max of £3m in total.
2) Co. may set a clearly defined target at time of option.
3) Options can be granted at a discount below MV, although there are tax consequences.
Provided conditions are met:
- No IT or NIC at grant
- No IT or NIC at exercise unless shares issued at discount.
At exercise, there will be an IT charge based on lower of:
- The discount
- The difference between MV and price paid.
- On sale, gains are subject to CGT. The cost of the shares is amont paid plus any discount taxed as earnings.
Share incentive plans (SIP)
Co. sets up SIP and gives it money. The SIP then buys shares and holds them on behalf of the employee.
4 ways shares can be acquired:
1) Free shares can be given uptp £3.6k
2) Employee can purchase partnership shares at any time. The amount to be paid is deducted from the employees pre-tax salary upto lower of:
- £1800
- 10% of salary in any tax year.
3) Award matching shares free to employees who purchase partnership shares at max ratio of 2:1
4) Dividends on shares in the SIP are tax free if dividends are used to acquire more shares.
Provided conditions are met:
- No IT or NIC when shares are given to employees
- If shares are held in SIP > 5 years, no IT and NIC when shares taken out.
- If shares are held in SIP 3-5 years, there is an IT and NIC charge based on lower of MV at award and MV of withdrawal.
- If shares are held for < 3 years there is an IT and NIC charge based on MV at withdrawal.
- There is no charge to CGT on shares taken out and sold immediatily. A charge to CGT will arise on sale to the extent shares increase in value after they’re withdrawn from the plan.
