Employment income Flashcards
Employees are generally taxed on
The earliest of
Receipt
Entitlement
What is the profirma for employment income?
Salary
Bonus
Benefits
Less allowable deductions
Total employment income
What are the factors indicating employment?
Whether:
There is a degree of control
The worker must accept the work the work that is offered
The person must provide further work
Entitled to employment benefits
The worker works for just one person or an organisation
What are the factors that indicate self employment?
If the worker provides their own equipment
If the worker hires their own helpers
The degree of financial risk the worker takes
The degree of responsibility for investment and management the worker has
If the worker can work when they weant
If the worker can work for multiple people
For what employee benefit is there no adjustment for abcontribution towards the cost?
Fuel - unless fully reimbursed
Accomodation rules
If job related - Nil
If not, the greater of:
Annual value
OR
Rent paid by the employer + additional charge if cost of accomodation is OVER £75,000. % (offic rate of interest) X (Cost-£75,000)
Living expenses
If job related - Cost - limited to 10% of net earnings
If not - Cost
Use of employers Assets
20% of original cost/rental cost.
Asset given to employees
Cost
OR
If used: Greater of
MV on date given
MV on date of aquisition less benefits assessed (does’nt apply for cars, vans or bicycles)
Beneficial loans
Interest at offical rate if over 10k
Medical insurance
Cost
Fuel for private
£27,800 X CO2%
Company Van
£3,960 unless for 0 emission then Nil.
Fuel is £757
Use of company car
2% for electric vehicles
Hybrid is between 1 and 50 - check tables
If emissions are 51-54 use 15% x List price
Otherwise the 16% base rate and rise by 1% for every 5g of CO2 starting at 55g
Maximum % that can be used is 37%
Dielsel cars that do not comply RDE2 have an extra 4% but max is still 37% for these
What is the mileage rate for cars/motorcycles/bicycles
Cars
45p x 10,000
25p x remaining
5p extra per passenger (no extra relief)
Motorcycles
24p
Bicycles
20p
If an employee doesn’t receive their mileage claim for their employer they’re entitled to?
Tax releif (unless it’s also for a passenger in the car)
When are gifts of goods taxable?
If the total, including VAT exceeds £250 per tax year. If it does exceed the entire amount is taxable.
When are non cash awards of service not taxable?
If the period of service was at least was at least 20 years, no similar award was made in the past 10 years and the cost is no more than £50 per year.
When are employee awards exempt?
Formal scheme open to all
Less than £5,000
Awards if less than £25 or the award is only made after the decision is made to implement the suggestion
Awards over £25 reflect the financial importance of the suggestion to the business and dont exceed 50% of the financial gain of the business in the first year of implementation or 10% of net benefit over 5 years
Awards of £25 or over are shares on a reasonable basis
If an employer provides a bus for emoloyees it must
Bus - have at least 12 seats
Minibus - 9 seats
Must mainly be used by employees
When is transport exempt?
Can be covered if public transport is disrupted or car sharing arrangements break down
Mobile
Private use of one mobile phone. The second phone is made taxable.
Exempt - Staff parties
Less than £150/head (inc VAT) over the year
Exempt : Private medical
Paid to cover health issues whilst employee is abroad working
Exempt: Reccomended medial treatment
Up to £500. per employee per tax year. Must be reccomended by a medical professional in writing and be related to aiding the employee coming back to work after injury or health longer than 28 days. If the payment exceeds £500 the entire amount is taxable.
Exempt: Trivial benefits
Any amount custing up to £50 per employee
Exempt: Pension advice
£500 per employee per tax year under schemes open to all employees. If payment exceeds £500 then the excess is taxable.
Liabilities and insurance
Insurance can be deducted if it relates wholly to the employment and it only renewed for up to 2 years at a time and is paid for by the employer
When is travel not for business
If business is done on the way to work this doesn’t make it a business journey
If the journey is essentially the same as going to work it also doesn’t count
Travel rules
A place is deemed a place of continuous work if it lasts for more than 24 months and more than 40% of work is completed there
When does a company not get thew employers allowance?
If the director is the sole employee
If the employers contributions were more than £100,000 the year before
What are the different types of NI and who pays what?
Class 1 - Employees and employers
Class 1a - Employers
Class 1b - Employers
Class 2 & 4 - Self employed
Class 3 - A voluntary contribution
In general non c ash vouchers are subject to NIC, however the following are exempt:
Childcare vouchers up to the exempt amount
Vouchers for use of sports facilities (where tax exempt)
Transport vouchers where the employee earns less than £8,500 per year
NIC’s are calculated in relation to
an earnings period of which earnings are deemed to relate
A director has an annual eanrings period regardless of how they’re paid
Whzt types of employees are exempt from having the employment allowance used
Directors as the sole employee
Employers who employ personal pervises such as household cleaning.
Public authorities
Carry out functions wholly or mainly of a public nature such as NHS.
When are Class 1a NIC not taxable on the employer?
If taxed wihtin Class 1
Incdlued on a PAYE Settlement
Not required to be on a P11d
When is payment for Class 1a NIC due?
Bank transfer 22 July
Cheque 19th July
What is a personal services company?
The name given to a company caught by anti avoidance legislation / IR35.
When calculating the Deemed salary for a PSC to a small organisation you
Income from relevant engagements X
Less stat 5% (X)
Less salary/benefits paid to worker (X)
Less employers NIC on actual payments (X)
Less expenses allowable under employment income (X)
Gross Amount of deemed payment X
Employers NIC on gross deemed payment (X) (G x 13.8/113.8)
Actual deemed payment to worker X - Treated as paid on the last day of the tax year
Who is responsible for determining IR35?
Small companies - the worker
Medium and large companies - the client
What will the client do if they determine IR35 to apply?
They will issue a “Status of determination Statement” to the PSC and the individual
Any challenge of this decision should be made before the final payment for services and any challenge should be resolved within 45 days
If IR35 applies to medium and large companies what happens?
The client has to pay income tax and NIC ona deemed direct payment. So with a medium or large client it is the client that witholds the income taxes
How is the Deemed Direct Payment calculated for IR35 in medium and large businesses?
Payment in respect of services (net of VAT)
Less direct costs incurred by PSC
Less deductible employee expenses incurred by PSC
DDP =
When are termination payments fully exempt?
For death, injury or disability
Approved lump sum on retirement
Legal costs revovered from employer following legal action due to loss of employment
When are termination payments taxed as normal in the year of receipt?
Reward for services (past or future)
Compensation for lack of office which is contractual
Post employment notice pay
Rules in relation to other termination payments
Other payments such as compensation for loss of office (non contractual)
Use of company car after termination
Payments in respect of notice period
Rules:
First 30k is tax free
If stat redundancy is recieved this reduces the 30k. Excess over 30k is taxable as employment income in the year receieved and is taxed at top slic eof income.
Only Class 1a NIC due on the excess
When there is a termination of employment during the notice period, what happens?
If payment is made at point of termination.
The basic salary portion is taxed as normal.
Any balance falls within the redundancy pay rules of 30k
If the employee is given shares or sold at a discounted rate
The employee will be taxed on the difference between market price and the discounted value
When these discounted shares then attract CGT
They are taxed on the gross amount / full market value
If the shares are readily convertible assets (can be sold on the stock exchange) then
an amount equal to the amount charged to income tax is treated as earnings for NIC meaning Class 1 NIC will be due
What is a share scheme?
Whereby a company gives/sells shares to its employees, often as part of a renumeration package.
Grant -
Exercise -
Disposal -
The date that the employee is given the right to buy shares at a future date at a price set now
The date the employee decides to take up the rights and buy the shares
Once the employee owns the shares they can then choose when to go on and sell the shares
When is a share scheme tax advantaged?
If it complies with certain conditions, but then it is less flexible but does have preferential tax treatment.
Explain the different in tax between tax advantages and non tax advantaged schemes at the grant stage
No tax for both
Explain the different in tax between tax advantages and non tax advantaged schemes at the exercise stage
Non advantaged -
Income tax (and NIC if listed shares)
MV at Exercise X
Less Exercise price (X)
Taxable X
Tax advantaged - No tax
Explain the different in tax between tax advantages and non tax advantaged schemes at the exercise stage
Non tax advantaged -
Proceeds X
MV at exercise (X)
Gain X
Tax Advantaged
Proceeds
Cost (X)
Gain X
Is a tax advantaged share scheme a deductible cost for the company?
Yes
What is a Save As You Earn (SAYE) scheme?
When an employee puts away a fixed amount per month for a number of years and the interest is tax free. At the end of the period they can either take the cash or take the option to exercise the shares (ordinary) at the price set when granted (Can be holding company too)
The tax free interest amount is:
Amount x Years + tax free bonus
What are the consequences if the scheme is tax advantaged?
There is no tax or NI on the share options granted or exercised
On the sale of the shares the gain is subject to CGT and the cost in the calculation is the amount the employee paid for the shares
There is no tax or NI if the employee choses to take the cash
SAYE Conditions to qualify
An employer can set up the scheme if:
Open to all employees on similar terms
Part time directors can be included or excluded
A minimum employment period of up to 5 years can be imposed
Can save between £5 and £500 per month
Shares must be at least 80% of the MV at the date the option was granted
Company share option plan (CSOP) - Conditions to qualify
Can be restricted to select employees and full time directors - granted options to buy shares.
Options must be exercised between 3 - 10 years from grant to achieve beneficial tax treatment
Can be granted options over shares up tp the value of £30,000 at the date of grant
Company share option plan (CSOP) - provided these conditions are met
There is no income tax or NI on grant or exercise of the option
On sale of the shares there is onlt CGT and the cost is the amount paid by the employee.
Company share option plan (CSOP) - conditions
Shares must be fully paid ordinary
Share price must not be less than the MV at the time of the grant of the option
Limited to employees and directors - but doesn’t have to be available to everyone
Cant be granted if it would take the total MV of shares for which an employee owns over 30k
If the issuing company has more than one class of shares the majority of shares in which the scheme operates must not be held by:
Those aquiring through position
A holding company (unless scheme shares are quoted)
Anyone who has owned over 30% of the shares in the past 12 months
CSOP - There is no income tax or NI on
The grant of the option
The profit arising from the exercise of an option if it is exercised between 3 - 10 years after grant
CSOP - When are the shares still exempt if exercised before 3 years
cessation of employment due to injury, disablility, redundancy or retirement
Cash takeover of the company which results in forces exercise of the shares
EMI - Enterprise management incentives - What conditions have to be met for the company?
Companies gross assets must not exceed 30m
Not be under the control of any other company
Must carry on one of the qualifying trades
Permanent establishment in the UK
Less than 250 full time equivalent employees at the time the options are granted
EMI - Enterprise management incentives - What conditions have to be met for the employee?
Must be employed by company or group for minimum 25 hours per week OR at least 75% of their working time (including self employment)
Employees who own more than 30% of the ordinary shares are excluded
EMI - Enterprise management incentives - Qualifying shares?
Must be fully paid up and irredeemable
EMI - Enterprise management incentives - Limits
At any one time an employee can hold EMI options over shares of up to £250,000 at the date of grant. If options are granted over this limit there is only relief up to the limit. No more options may be granted after 3 years once the max is reached.
Any options granted under CSOP eeduce the £250,000 limit but SAYE options can be ignored
EMI - Enterprise management incentives - Disqualifying events
An employee ceasing to spend 75% of their working time with the company
There will be a tax charge on the exercise of the EMI option unless done within 90 days of the disqualifying event
SIP -Share Incentive Plans
Where a company sets up a trust and gives the trust/SIP money
The SIP then buys shares and holds them on behalf of the employees.
All full or part time employees must be eligible to participate
SIP - What are the 4 ways shares can be aquired by the members of a SIP
Free shares of up to £3,600 can be given to each employee per year. must be available to all employes and can be in the range of 0 - £3,600 based on employee targets etc
The employee can purchase partnership shares at any time during the year. The amount sharged will be lower of £1,800 or 10% salary in any tax year and is deducted pre tax
The employer can award matching shares free to employees who purchase shares at a maximum ratio of 2:1
Dividends on the shares in a SIP are tax free if the dividends are used to purchase more shares
What are the tax treatments on a SIP ?
There is no tax or NI when the shares are given to the employee and put into the SIP
If the shares are held:
More than 5 years - No IT or NIC when taken out
3-5 years - IT and NIC based on lower of MV at award and MV at withdrawl
Less than 3 years - IT and NIC based on MV at withdrawl
There is no CGT if the shares are taken out of the plan and sold immediatly (as will be dealt with via CGT)
SIP - What makes a SIP qualify to be tax advantaged?
shares must be fully paid irredeemable ordinary shares in a company either
Listed on stock exchange (or sub or other group companies)
Not controlled by another company
A minimum of 18 months of employment can be specified
SIP - Other rules
A plan MAY provide for free or matching shares to be forfeited if employee leaves unless due to redundancy or retirement.
Plan must be operated through UK resident trust
