Employment Income - Additional Aspects

Question 1

Which types of Termination Payment are wholly exempt from income tax and NIC?

Answer 1

• Death, Injury & Disability
• Approved Lump Sum on Retirement
• Statutory Redundancy (but eats into £30,000 exemption limit)

Question 2

Which types of Termination Payment are fully taxable in terms of income tax and NIC?

Answer 2

• Pay In Lieu of Notice (PILON) where Contractual

- Reward for Past/Future Services

Question 3

How are fully taxable Termination Payments taxed?

Answer 3

In year of receipt as NSI.

Question 4

Which types of Termination Payment are exempt upto the £30,000 limit?

Answer 4

• Statutory Redundancy Pay
• Genuine compensation for loss of office
• Continued provision of any benefit

Question 5

How is the excess amount over the exempt limit for taxable Termination Payments taxed?

Answer 5

Taxed as specific employment income

i.e. income tax but not NIC.

Question 6

What is a share scheme?

Answer 6

Whereby a company gives/sells shares to its employees often as part of a remuneration package.

Question 7

What are the three elements of a share scheme set up?

Answer 7

1. Grant
2. Exercise
3. Disposal

Question 8

What is the ‘Grant’ element of a share scheme and the tax implications?

Answer 8

The date that the employee has the right to buy shares at a future date at a price set now

No income tax or NIC.

Question 9

What is the ‘Exercise’ element of a share scheme and the tax implications?

Answer 9

When the employee decides to take up the rights and buy the shares.

Income Tax & NIC only for unapproved/Non-Advantaged Schemes.

Question 10

What is the ‘Disposal’ element of a share scheme and the tax implications?

Answer 10

When the employee owns the shares they can then choose when to sell the shares.

Capital Gains Tax can arise.

Question 11

What are the two variations of a share scheme?

Answer 11

1. Non Advantaged/Unapproved

2. Advantaged/Approved

Question 12

What is the ‘Grant’ tax implications of a Non-Advantaged Share Scheme?

Answer 12

No Tax.

Question 13

What is the ‘Grant’ tax implications of an Advantaged Share Scheme?

Answer 13

No Tax.

Question 14

What is the ‘Exercise’ tax implications of a Non-Advantaged Share Scheme?

Answer 14

Income Tax (& NIC if listed shares/readily convertible assets)

MV at Exercise
Less Exercise Price
= Taxable Value

Question 15

What is the ‘Exercise’ tax implication of an Advantaged Share Scheme?

Answer 15

No Tax.

Question 16

What is the ‘Disposal’ tax implication of a Non-Advantaged Share Scheme?

Answer 16

Capital Gains Tax

Proceeds
Less MV at Exercise
= Gain

Question 17

What is the ‘Disposal’ tax implication of an Advantaged Share Scheme?

Answer 17

Capital Gains Tax

Proceeds
Less Cost
= Gain

Question 18

Why is it better to use an Advantaged Tax Scheme over a Non-Advantaged Scheme?

Answer 18

In Advantaged - we only pay tax on disposal which is CGT. CGT is taxed at a lower rate than Income Tax.

In Non-Advantaged - we are taxed at exercise at income tax rate and then again on disposal at CGT. Income tax rate is higher than CGT rate.

Therefore as we are only taxed on CGT in an advantaged scheme which is a lower rate we should favour the advantaged scheme over a non-advantaged scheme.

Question 19

What are the four types of advantaged share scheme?

Answer 19

1. Enterprise Management Incentives (EMI)
2. Company Share Option Plans (CSOPs)
3. Savings Related Scheme (SRS) / (SAYE)
4. Share Incentive Plans (SIPS)

Question 20

Which share schemes are available only to key/senior management employees?

Answer 20

1. Enterprise Management Incentives (EMI)

2. Company Share Option Plans (CSOPS)

Question 21

Which share schemes are available to all employees?

Answer 21

1. Savings Related Scheme (SRS) / (SAYE)

2. Share Incentive Plans (SIPS)

Question 22

What are the four ways to acquire shares under the SIP scheme?

Answer 22

1. Award free shares upto a value of £3,600 p.a.
2. Partnership shares upto lower of:
   - £1,800
   - 10% of salary
3. Can be given matching shares - max 2 for every partnership share.
4. Can buy dividend shares from dividend income from the three types of shares above.

Question 23

What are the IT, NIC & CGT rules on matching shares?

Answer 23

> 5 years: no IT/NIC
3-5 years: IT/NIC on value at award (or withdrawal if lower)
< 3 years: IT/NIC on value at withdrawal

CGT on gain on sale.

Question 24

What are the tax rules for Dividend shares under SIP?

Answer 24

Dividends are tax free if used from dividend income and held for three years.

If withdrawn before three years, tax in year of withdrawal.

Question 25

What is the timeframe for contributions for Savings Related Schemes?

Answer 25

Three or Five Year Contributions.

Question 26

What is the contribution limit for SAYE under SRS?

Answer 26

£5 min to £500 max a month.