Employment Income Flashcards
NIC on employment income
3 types of NIC are applicable:
-Class 1 Employee NIC (Cash benefits)
-Class 1 Employer NIC (Cash benefits)
-Class 1a Employer NIC (Non cash benefits)
Class 1 Employer NIC and any allowance?
paid by employer on all cash benefits given during the year
allowance of 5000 available to employer on TOTAL Class 1 NIC paid on behalf of all employees. it is deductable from total NIC payable
For this employment allowance:
-cant have only 1 employee who is director
-last year CLASS1 ER NIC must not be more than 100,000.
what are termination benefits
Amount paid to employee at the time of termination of job
3 heads of termination benefits
-Wholly exempt payments
-Wholly chargeable payments
-Partially exempt payments
Wholly exempt payments
No Income tax or NIC
These are the amounts paid by employer due to LEGAL OBLIGATION (statutory redundancy payment, disability payment, ordered by court)
Wholly chargeable payments
These are the amounts paid under a CONTRACTUAL obligation. Eg. Notice period payment or payment made under any contract
On these payments, INCOME TAX + NIC (class 1 ER and class 1 EE) are payable
Partially exempt payments
These are amounts paid without any Legal or contractual obligations for eg. Ex gratia payments
or non cash benefits like car or accomodation uptil a certain period after termination
Exemption is available for them upto 30,000
HOWEVER this limit will be consumed if any wholly exempt payments are also made.
On excess amount, Income tax + Class 1a NIC is payable
if employee is given lesser notice period as compared to contract, then notice period payment will be adjusted from ex gratia payment amount
ben’s contract had a notice period of 3 months, but his employer only gave him 1 month notice before termination. he got an ex gratia payment of 100k.
his salary is 20k
ben should have received his salary of 2 months.
the ex gratia payment is actually not 100k, it’s
100k minus 2 months salary (20k*2=40k)
ex gratia payment is really only 60k.
on this 30,000 is exempt and 30,000 will be subject to income tax + class 1A NIC
What is share based renumeration and its two types?
When employer gives shares to employee as part of the remuneration package.
two types are:
-share incentive/ transfer of shares (immediate)
-share options (agreement to transfer shares at a future date)
what are the tax implications of share incentives/ transfer of shares?
MV less paid, Tax & NIC apply
MV of shares less amount paid by employee= employment benefit…
on this employment benefit, income tax and NIC will be payable
NIC:
Cash benefit if quoted company
Non cash benefit if unquoted company
what will be the tax implication when employee disposes these shares?
CGT will arise on it.
Chargeable gain=
DP less MV when shares were transferred
(not cost because the employee has already been taxed on market value)
What are the 3 dates important in share options agreement?
1) Grant date: date on which agreement is done
2) Exercise date: date on which employee can exercise the share options and get actual shares
3) disposal date: date on which employee disposes the acquired shares
what are the two types of share option agreements?
approved share option plans
unapproved share option plans
tax implication of approved share option plans
1- grant date: no tax assessment
2- exercise date: no tax assessment
3- disposal date: CGT will be assessed on DP less cost
tax implication of unapproved share option plan
1- grant date: no tax assessment
2- exercise date: employment benefit will be assessed. tax+ NIC will be paid. Quoted-1,UnQuoted1A
3- Disposal date: CGT will be assessed on:
DP less MV of shares on exercise date.
similar treatment as transfer of shares
4 types of approved share option plans
1) CSOP: Company share option plan
2) EMI: Enterprise management incentive plan
3) SAYE: Save as you earn plan
4) SIP: Share incentive plan 5)
CSOP- company share option plan
Not all, DF 30-3-10-30K, Allowed exp for ER.
Not all: plan is not required to be offered to all employees
D-Director must be full time
F-Full-time or part-time employees are allowed (if not a director).
3-= not more than 30% ownership
3-10= EXERCISE PERIOD
30=The maximum value of shares granted is £30,000 per employee (based on market value at the grant date).
exercise price?
equal to market value on grant date
M-V = The exercise price is equal to the market value on the grant date.
Allowed exp for ER= Employers can claim an expense based on the market value at exercise date less the exercise price (up to £30,000).
EMI- enterprise management incentive plan
Not all, DF 30-3-10-30K, Allowed exp for ER.
to whom it can be offered:
plan is not required to be offered to all employees
-employees to whom it is offered must meet the following conditions:
1) full time employees
2) not more than 30% ownership
exercise period?
0-10 yrs
exercise price?
equal to market value on grant date. HOWEVER if exercise price is less, whole plan will not become disapproved. the difference will become employment benefit on exercise date.
max value of shares granted?
under 250,000 per employee (market value of shares at grant date) however if CSOP is also granted, max limit will reduce by value of CSOP.
employer can claim allowed expense from trading pnl (since cheaper shares) (MV on exercise date less exercise price )
WHICH organisations can offer EMI?
-less than 250 employees
-gross assets less than 30million
-organisation should not be a 51% sub of any other company
Disposal of EMI shares, tax impication
Business Asset Disposal Relief (BADR) conditions are relaxed
-condition of 5% ownership is waived
-two years ownership period requirement is started from grant date
SAYE (SAVE AS YOU EARN)
to whom it can be offered:
not flexible, must be offered to all employees
-employer can keep a condition of must be continuously employed upto 5 years
time period?
3 years OR 5 years
employees make a maximum saving contribution of 500 per month. Employer can pay tax free interest income to employees on this saving
at maturity date, employees can choose to withdraw cash OR use that fund to exercise share options
exercise price?
can be between 80% to 100% of market value on grant date.
employer can claim allowed expense from trading pnl.
SIP (SHARE INCENTIVE PLAN)
to whom it can be offered:
not flexible, must be offered to all employees
-employer can keep a condition of must be continuously employed upto 18 MONTHS
-employer can give free shares uptill 3600 pounds per employee per year
-employer can also give employees the option to purchase partnership shares (at normal market price) limit would be lower of:
-1800 pounds
-10% of employment income
-cost to purchase these shares will be an allowed expense from employment income
-ER can give free matching shares for the purchased partnership shares ($2 for every 1$)
eg. if employee bought 1800$ shares, employer can give free matching shares worth 3600$
-if dividend income from these shares is used to purchase more shares, it will be exempt from income tax
-shares acquired through SIP must be owned for 5 years
SIP shares disposal implications
-if shares are sold after 5 years no income tax or NIC
-if sold within 5 years, employment benefit will arise and income tax and NIC will be payable
if sold within 3 yrs, Disposal proceed will become employment benefit
if sold after 3 yrs but within 5 yrs, then employment benefit will arise on lower of:
1) disposal proceeds
2) MV when shares were given
