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
SIP shares - CGT Implication?
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
pro forma for calculating taxable employment income?
salary
xxx
bonus xxx
other cash allowance xxx
non cash benefits
xxx
less allowed expenses
(xxx)
_____________________
employment income xxx
================
When is car benefit calculated and how?
When= When employer gives a car to employee for private use
How=
If rented, then rent amount is the benefit for emplyoee
If owned then Car benefit= cost of car x car benefit % (given in exam)
what is included in cost of car when calculating car benefit?
cost of car packet includes:
list price (ignore discounts gotten by employer)
Costs to purchase (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.
accessories
-disability and child car seat are exempt accessories
-accessories added in current fiscal year are taxed from next fiscal year
how will co2% be calculated if=
1) Regular car emmission above 55g
2) diesel car not meeting RDE standard
always round down to nearest 5, for co2 emmission.
Taxable Percentages:
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.
If the car isn’t available for part of the year (like if it’s being repaired)
the taxable benefit amount is reduced.
if employee is contributing for usage of car
deductable from benefit
How is fuel benefit calculated?
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 will be given in exam
if employee pays usage contribution it will be deducted from benefit value
impact on fuel benefit if car is available for only part of the year
proportion accoridng to months
if fuel benefit is only provided for 6 months vs. if its stopped for 1-2 months in between
if provided for only 6 months, then proportion
fuel benefit will not be reduced in 2nd case of temporary cessation
Van benefit if ER has given van for private use
if the van is weight more than 3500kg then benefit will be calculated.
Van benefit is fixed, given in exam, if private fuel also given then add that too
Zero emmission van will not result in benefit
if employee pays usage contribution it will be deducted from benefit value
if weight of van exceeds 3500 kgs
van benefit is exempted
if co2 emmission of van is 0
no van benefit
why and how should a person do planning in fuel benefit
Fuel benefit is based on a set amount, not how much fuel you use. It depends on CO2 emissions. The value is added to your income, increasing your tax. If you don’t use much fuel, check if the tax is more than if we just got fuel ourself
what is accomodation benefit
when employer provides accomodation to employee
how is accomodation benefit calculated?
it is calculated in 3 parts: BAA
-basic charge
-additional charge
-acillary charge
what is the basic charge
basic charge
is higher of:
-actual rent paid by employer
-annual value of accomodation (market value)
what is the additional charge
additional charge:
will only be charged if place is owned by employer and its value exceeds 75,000
it is calculated by:
((cost of house +improvements)-75000)*2.25%
improvements done in current year will be considered from next year
-if house was bought 6 yrs before given to EE, then MV of house will be used instead of cost
what is ancillay charge
if employer is paying any running cost of the house, then that benefit will be wholly chargeble
if the property is furnished
furniture ki 20% MV will be taxable benefit (when first made available)
an accomodation is job related accomodation if??
1- necessary for employment
2- better performance of job
3- security reason
can be any one of these
what are the tax implications of Job related accomodation
-basic charge exempted
-additional charge exempted
-ancillary charge is taxable upto 10% of employment income maximum
what is usage benefit
when employer provides asset other than car, fuel, van, accomodation.
could be laptop, furniture, TV etc
how is usage benefit calculated?
-cost of asset *20% if owned by ER
or
if not owned then actual rent paid by employer
if EE paid usage contribution then deduct from benefit value
what are exempt benefits
No tax or NIC on them.
1) One mobile phone per employee
2) Parking Facility
3) Educational Subscriptions
4) Canteen food free or subsidized (office expense reimbursement)
5)Pension plan contribution by ER
6) Home worker allowance uptil 6 GBP per week
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, excess is chargeable
10) childcare facility if owned by ER then exempt, if vouchers then chargeable
11) loan less than 10,000
if done by third party then not exempt
Childcare services provided by 3rd party - how much max benefit can be exempted?
-55/week for basic rate tax payer
-28/ week for higher rate tax payer
-25/week for additional rate tax payer
what is a gift benefit
arises when employer gifts an asset to employee
what is the amount of gift benefit?
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
what is loan benefit
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% (given in paper)
if loan balance changes during the year?
loan benefit will be higher of:
1) actual pro rations
2) average basis:
(highest + lowest)/2
if loan balance remains below 10,000 throughout the year?
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.
allowed expenses for employment income?
-contribution in OPP
-cost to purchase partnership shares (under approved plans)
-educational subscriptions paid by EE
-official expenses done by EE
-Mileage allowance
what is mileage allowance
when an Employee uses personal vehicle for official travelling. (not from home to permanent workplace, but from work to client for eg.)
upto 10,000 miles - 45 pence/per mile is allowed
above 10,000 miles- 25 pence/per mile is allowed
permanent workplace (more than 2 yrs)
if employee gives cash allowance to EE for using their own vehicle
wholly taxable
what is official travelling
it means travelling to temporary workplace. where expected period of work is less than 24 months
-travelling to permanent workplace is not official travelling
