Module 6 – Tax

Question 1

Where are the rules about tax on employment income? (Notes – 2.1)

Answer 1

Most of the law relevant to employment income is in the Income Tax (Earnings and Pensions) Act 2003 (‘ITEPA’).

Question 2

How is tax on employment income generally collected? (Notes – 1.3)

Answer 2

Tax on employment income is generally collected through pay–as–you–earn (or ‘PAYE’), rather than by self–assessment.

This means that tax is deducted from every payment made by an employer to an employee, and passed on to HMRC.

Question 3

What are benefits in kind? (Notes – 2.5)

Answer 3

They are benefits received by an employee in any form other than cash.

Question 4

What are earnings? (Notes – 2.4)

Answer 4

Earnings are defined in Section 62 ITEPA, which provides that they include ‘any salary, wages, fee, any gratuity or other profit or incidental benefit of any kind…if it is money or money’s worth’, or
‘anything else that constitutes an emolument of the employment’.
This basically means salary and cash bonus, plus benefits in kind.

Question 5

Are National Insurance contributions (NICs) charged on shares? (Notes – 4.4)

Answer 5

The general rule is that NICs are charged on all shares received by an employee, provided the shares
are ‘readily convertible assets.’

Question 6

How are options taxed? (Notes – 6.8)

Answer 6

There is no tax on grant, or on vesting. The employee is not taxed until the option is exercised, at
which point the employee becomes unconditionally entitled to the shares.
The amount on which income tax is charged when an option is exercised is the market value of the
shares on the date of exercise, minus the option (exercise) price paid, if any. This taxable amount is
often called the option gain or spread.

Question 7

How are conditional share awards taxed? (Notes – 6.7)

Answer 7

There is no tax on grant.

The employee is not taxed until the award becomes unconditional and the employee becomes unconditionally entitled to the shares.

This is normally called the time of ‘vesting’.

The amount on which the employee pays tax is the market value of the shares at the time of vesting.

Question 8

How is capital gains tax calculated? (Notes – 5.6 and 5.7)

Answer 8

The basic rule, on sales of assets, is that the gain is the amount received on the sale, minus selling costs, less the ‘base cost’ (which is normally the amount originally paid for the assets when they were acquired).

Question 9

How is capital gains tax paid? (Notes – 5.4)

Answer 9

Capital gains tax is paid by the individual directly to HMRC, through self–assessment.
The individual may submit a self–assessment return to HMRC before 31 January in the year following
the end of the year when the disposal was made. For example, if a gain is triggered in
November 2024, this will fall within the tax year ending 5 April 2025, and so must be reported and
paid by 31 January 2026.
In addition to the self–assessment regime HMRC have introduced a ‘real time’ reporting tool which
enables participants to report gains, and pay the corresponding tax, without needing to complete a
self–assessment return (although if a return is being prepared for other reasons, the gain would also
need to be included). The deadline for payment of the tax is the same as the self–assessment
deadline (see previous paragraph) but the deadline for reporting is one month earlier. For example,
a gain made in November 2024 will fall within the tax year ending 5 April 2025 and so must be
reported by 31 December 2025 and the tax paid by 31 January 2026.

Question 10

What is PAYE? (Notes – 3 and 3.2)

Answer 10

PAYE is a mechanism for employers to collect tax from employees and to pass it on to HMRC.

Question 11

When is a statutory corporation tax deduction given (if available) in respect of employee share
awards? (Notes – 10.5)

Answer 11

The deduction is given in the year in which the employee actually acquires the shares.
This is likely to be some considerable time after the company has actually incurred the expense of
acquiring the shares, if it funds the trust to acquire shares at the time of grant. No deduction is given
if the employee does not acquire any shares. This could happen because an award fails to vest, or because an option is underwater. It could also happen if the employer needs to cash out the award,
rather than providing shares, perhaps in the circumstances of a takeover.

Question 12

Who is in charge of tax?

Answer 12

His Majesty’s Revenue and Customs (HMRC)

Question 13

Who is in charge of tax?

Answer 13

His Majesty’s Revenue and Customs (HMRC)

Question 14

When does the tax year run?

Answer 14

6 April until the 5th April

Question 15

What are the self assessment timelines?

Answer 15

Paper, 31st October
Online, 31st January
For the previous tax year

Question 16

What is the tax code for former employees?

Answer 16

0T - which assumes the participant has no personal allowance

Question 17

What is the PAYE deadline?

Answer 17

Charges in the month must be paid within 14 days of the end of the tax month
Tax months run from the 6th to the 5th

Question 18

What is a readily convertible asset?

Answer 18

Shares are readily convertible assets if there is a market for them.

Question 19

What happens if PAYE if not deducted?

Answer 19

1. Employer is still liable
2. Employee may be subject to an extra charge if they don’t make it good

Question 20

Can an employer transfer the cost of employer NICs to employees?

Answer 20

Yes, if
1. There is an agreement (usually included in award documentation) - most common
2. There is a formal joint election approved in advance by the HMRC

Question 21

What is the rate of employer NI?

Answer 21

13.8%
Plus 0.5% Apprenticeship Levy if annual pay bill is in excess of £3m

Question 22

Where are the rules for Capital Gains Tax?

Answer 22

Set out in the Taxation of Chargeable Gains Act 1992

Question 23

What is a Section 431 election

Answer 23

Means the participant pays tax on forfeitable shares at grant, NOT when they cease to be forfeitable/restrictions are lifted

Risk, they would pay less tax if the price increases, but would have paid more should it decrease

Elections must be made within 14 days of grant, in a format prescribed by the HMRC (but do not have to be filed)

Question 24

Where is the legislation for CSOPs

Answer 24

Chapter 8 of Part 7 and Schedule 4 of ITEPA

Question 25

When are CSOPs NOT taxable? 4 answers

Answer 25

1. On exercise
2. On the first £60k of shares under option
3. Exercises three years after date of grant
4. Exercise less than three years if they are a good leaver;

b) takeover
c) transfer of company
d) transfer of employment
e) within six months of cessation of employment

Question 26

What is Tax Evasion v Tax Avoidance

Answer 26

Evasion is the breaking of law to pay less tax.
Avoidance is exploitng legal loopholes to achieve a tax outcome that was not intended by the legislation

Question 27

Acr and what is the General Anti-Abuse Rule (GAAR)

Answer 27

The Finance Act 2013 created this to apply avoidance to share plans

Question 28

How does Corporation Tax apply to share plans?

Answer 28

UK companies can claim a statutory corporation tax deduction in respect of share awards made to employees

Question 29

What is corporation tax?

Answer 29

Tax which companies pay on profits and capital gains

Taxable Amount = income - expenses

Question 30

Where is the legislation for corporate tax statutory deductions for all share plans EXCEPT SIP?

Answer 30

Part 12 of the Corporation Tax Act 2009

Question 31

Where is the legislation for statutory tax deductions for SIP, and what are the deductions made on?

Answer 31

Part 11 of the Corporate Tax Act 2009.
Deduction made at the time MATCHING or FREE shares awarded.
No deduction for dividend shares.

Question 32

When must new non-tax advantaged plans be registered with the HMRC on their Employment Related Securities online website?

Answer 32

6th July

Question 33

When a UK company establishes an offshore trust, when and why should they inform the HMRC?

Answer 33

Within 3 months
Required by Section 218 of the Inheritance Tax Act 1984

Question 34

What is a Section 431 election under ITEPA?

Answer 34

The employee and the employer may jointly elect for a different tax treatment to apply. If this election is made, the full market value of the shares is subject to income tax at the time the shares were awarded, without any reduction
as a result of the restrictions. There is no further income tax charge when the restrictions fall away.

I.E. THE EMPLOYEE AND EMPLOYER AGREE TO PAY THE TAX AT GRANT AND NO FURTHER TAX. s431 DOES NOT NEED TO BE SUBMITTED TO HMRC!

Question 35

What part of ITEPA is are the provisions relating to Disguised remuneration found?

Answer 35

Part 7A