Employment Income

Question 1

What is employment income

Answer 1

income earned through employment. It includes both cash and non cash benefits

Question 2

income tax on employment income

Answer 2

treated as a non saving income

Question 3

NIC on employment income

Answer 3

3 types of NIC are applicable:
-Class 1 Employee NIC
-Class 1 Employer NIC
-Class 1a Employer NIC

Question 4

Class 1 Employee NIC

Answer 4

paid by employee on all cash benefits earned during the year (salary, bonus, cash allowances)

1-12,2570= 0%
12,571- 50,270= 12%
50,271+ =2%

Question 5

Class 1 Employer NIC and any allowance?

Answer 5

paid by employer on all cash benefits given during the year (salary, bonus, cash allowances)

1-9100- 0%
9101+=13.8%

there is an employer allowance of 5000 available to employer on TOTAL C1 NIC paid on behalf of all employees. it is deductable from total NIC.

For this employment allowance, employer must have more than 1 employee

Question 6

Class 1A employer NIC

Answer 6

paid by employer on NON CASH benefits given to employees (car, fuel, accommodation)

Rate is 13.8%

Question 7

what are termination benefits

Answer 7

Amount paid to employee at the time of termination of job

Question 8

3 heads of termination benefits

Answer 8

-Wholly exempt payments
-Wholly chargeable payments
-Partially exempt payments

Question 9

Wholly exempt payments

Answer 9

No Income tax or NIC
These are the amounts paid by employer due to LEGAL OBLIGATION (statutory redundancy payment, disability payment, ordered by court)

Question 10

Wholly chargeable payments

Answer 10

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

Question 11

Partially exempt payments

Answer 11

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 (13.8% straight) is payable. (whether the benefits are cash or non cash)

Question 12

What is share based renumeration and its two types?

Answer 12

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)

Question 13

what are the tax implications of share incentives/ transfer of shares?

Answer 13

employement benefit will be assessed in the following manner:
MV of shares less amount paid by employee.
on this employment benefit, income tax and NIC will be payable

NIC:
Cash benefit if quoted company
Non cash benefit if unquoted company

Question 14

what will be the tax implication when employee disposes these shares?

Answer 14

CGT will arise on it.

gain/loss will be calculated in the following manner:
Disposal proceed less Market Value when shares were transferred (not cost because the employee has already been taxed on market value)

Question 15

What are the 3 dates important in share options agreement?

Answer 15

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

Question 16

what are the two types of share option agreements?

Answer 16

approved share option plans
unapproved share option plans

Question 17

tax implication of approved share option plans

Answer 17

1- grant date: no tax assessment
2- exercise date: no tax assessment
3- disposal date: CGT will be assessed (on DisposalProceed less Cost)

Question 18

tax implication of unapproved share option plan

Answer 18

1- grant date: no tax assessment
2- exercise date: employment benefit will be assessed. (MV of shares less cost) income tax will be payable on employment benefit
NIC will also be payable. if shares are quoted then cash benefit NIC, if unquoted then non cash benefit NIC
3- Disposal date: CGT will be assessed on:
DP less MV of shares on exercise date.

Question 19

4 types of approved share option plans

Answer 19

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)

Question 20

CSOP- company share option plan

Answer 20

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) if director then must be full time employee
2) if not director then both full and part time are permitted
3) not more than 30% ownership

exercise period?
3-10 yrs

exercise price?
equal to market value on grant date

max value of shares granted?
under 30,000 per employee (market value of shares at grant date)

employer can claim allowed expense from trading pnl (since cheaper shares) (MV on exercise date less exercise price )

Question 21

EMI- enterprise management incentive plan

Answer 21

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 )

Question 22

WHICH organisations can offer EMI?

Answer 22

-less than 250 employees
-gross assets less than 30million
-organisation should not be a 51% sub of any other company

Question 23

Disposal of EMI shares, tax impication

Answer 23

Business Asset Disposal Relief (BADR) conditions are relaxed
-condition of 5% ownership is waived
-two years ownership period requirement is started from grant date

Question 24

SAYE (SAVE AS YOU EARN)

Answer 24

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.

Question 25

SIP (SHARE INCENTIVE PLAN)

Answer 25

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

Question 26

SIP shares disposal implications

Answer 26

-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

Question 27

SIP shares - CGT Implication?

Answer 27

if shares are sold immediately after withdrawn from plan, no CGT
if sold later then CGT will arise
cost of shares will be the MV of shares when withdrawn from plan

Question 28

pro forma for calculating taxable employment income?

Answer 28

salary
xxx
bonus xxx
other cash allowance xxx
non cash benefits
xxx
less allowed expenses
(xxx)
_____________________
employment income xxx
================

Question 29

When is car benefit calculated and how?

Answer 29

When employer gives a car to employee for private use

Car benefit= cost of car x CO2%

if an employer has taken the car on rent then the rent amount becomes the car benefit for employee

Question 30

what is included in cost of car when calculating car benefit?

Answer 30

cost of car packet includes:

list price (ignore discounts gotten by employer)
transportation cost
legal and registration cost
accessories
less: capital contribution done by employee (max 5000) eg. if ee actually paid 7000, u can still only deduct 5000.

Question 31

accessories

Answer 31

-disability and child car seat are exempt accessories
-accessories added in current fiscal year are taxed from next fiscal year

Question 32

how will co2% be calculated

Answer 32

co2 emmission rate will be given in question.
always round down to nearest 5, for co2 emmission.

Taxable Percentages:
1- Electric Cars (zero emissions) = 2%.

2-Hybrid cars- We will check electric power:

130 miles or more: 2%
70-129 miles: 5%
40-69 miles: 8%
30-39 miles: 12%
Less than 30 miles: 14%

Regular Cars:
emmissions of:
51-54 g/km: 15%
55 g/km and above: starts at 16% and increases by 1% for every 5 g/km, up to a max of 37%.

Diesel Cars: If a diesel car doesn’t meet RDE 2 standard, you add 4% to the percentage, but it can’t go over the 37% cap.

Question 33

If the car isn’t available for part of the year (like if it’s being repaired)

Answer 33

the taxable benefit amount is reduced.

Question 34

if employee is contributing for usage of car

Answer 34

deductable from benefit

Question 35

How is fuel benefit calculated?

Answer 35

when ER provides fuel for private use to employee, it will be taxed.
the amount will be:
Base figure* CO2% (same % used for car benefit)

base figure is £27,800

Question 36

impact on fuel benefit if car is available for only part of the year

Answer 36

proportion accoridng to months

Question 37

if fuel benefit is only provided for 6 months vs. if its stopped for 1-2 months in between

Answer 37

if provided for only 6 months, then proportion
fuel benefit will not be reduced in 2nd case of temporary cessation

Question 38

Van benefit if ER has given van for private use

Answer 38

Van benefit will be 3960 pounds
Private fuel for van benefit will be 757

Question 39

if weight of van exceeds 3500 kgs

Answer 39

van benefit is exempted

Question 40

if co2 emmission of van is 0

Answer 40

no van benefit

Question 41

why and how should a person do planning in fuel benefit

Answer 41

fuel benefit value does not depend on actual private fuel consumed, its fixed on base amount and co2 emmission.
fuel benefit then results in income tax as benefit value is added in employment income
if person is not using that much fuel, they should compare cost with income tax being paid on fuel benefit.

Question 42

what is accomodation benefit

Answer 42

when employer provides accomodation to employee

Question 43

how is accomodation benefit calculated?

Answer 43

it is calculated in 3 parts:
-basic charge
-additional charge
-acillary charge

Question 44

what is the basic charge

Answer 44

basic charge
is higher of:
-actual rent paid by employer
-annual value of accomodation (market value)

Question 45

what is the additional charge

Answer 45

additional charge:
this is incurred when place is owned by employer and its value exceeds 75,000
it is calculated by:

((cost of house +improvements)-75000)*2.25%

improvements added in current fiscal yr will be assessed next year
-if house was bought 6 yrs before given to EE, then MV of house will be used instead of cost

Question 46

what is ancillay charge

Answer 46

if employer is paying any running cost of the house, then that benefit will be wholly chargeble

Question 47

if the property is furnished

Answer 47

furniture ki 20% MV will be taxable benefit (when first made available)

Question 48

what are the tax implications of Job related accomodation

Answer 48

-basic charge exempted
-additional charge exempted
-ancillary charge is taxable upto 10% of employment income maximum

Question 49

an accomodation is job related accomodation if??

Answer 49

1- necessary for employment
2- better performance of job
3- security reason

can be any one of these

Question 50

what is usage benefit

Answer 50

when employer provides asset other than car, fuel, van, accomodation.
could be laptop, furniture, TV etc

Question 51

how is usage benefit calculated?

Answer 51

-cost of asset *20% if owned by ER
or
if not owned then actual rent paid by employer

Question 52

what are exempt benefits

Answer 52

No tax or NIC on them.
1) One mobile phone per employee
2) Parking Facility
3) Educational Subscriptions
4) Canteen food free or subsidized
5)Pension plan contribution by ER
6) Home worker allowance uptil 6 GBP per night
7) Medical insurance for overseas employees
8) Daily allowance uptil 10 per night if abroad, 5 per night if in UK
9) Relocation cost paid by employer uptil 8000
10) childcare facility if owned by ER then exempt
if done by third party then not exempt

Question 53

Childcare services provided by 3rd party - how much max benefit can be exempted?

Answer 53

-55/week for basic rate tax payer
-28/ week for higher rate tax payer
-25/week for additional rate tax payer

Question 54

what is a gift benefit

Answer 54

arises when employer gifts an asset to employee

Question 55

what is the amount of gift benefit?

Answer 55

higher of:
1) Market value of asset less amount paid by employee (if paid)

2) Cost of asset less benefit already assessed(in case it was given for use initally and gifted later) less any amount paid by employee

Question 56

what is loan benefit

Answer 56

if ER gives loan to EE on which interest rate is less than official rate of interest then loan benefit will arise

official rate of interest is 2.25%

Question 57

if loan balance changes during the year?

Answer 57

loan benefit will be higher of:
1) actual pro rations
2) average basis:
(highest + lowest)/2

Question 58

if loan balance remains below 10,000 throughout the year?

Answer 58

then loan benefit will be exempted. however if it goes above 10,000 in any part of the year then low balances will also get chargeable.

Question 59

allowed expenses for employment income?

Answer 59

-contribution in OPP
-cost to purchase partnership shares (under approved plans)
-educational subscriptions paid by EE
-official expenses done by EE
-Mileage allowance

Question 60

what is mileage allowance

Answer 60

when an Employee uses personal vehicle for official travelling

upto 10,000 miles - 45 pence/per mile is allowed
above 10,000 miles- 25 pence/per mile is allowed

Question 61

if employee gives cash allowance to EE for using their own vehicle

Answer 61

wholly taxable

Question 62

what is official travelling

Answer 62

it means travelling to temporary workplace. where expected period of work is less than 24 months
-travelling to permanent workplace is not official travelling