Month: April 2023

There are three types of pension schemes:
1. Basic rate tax relief at source
2. Net pay arrangement
3. Salary sacrifice.

We see via example below the best option.

Example – Luca earns a monthly salary of £2,000 and makes a contribution of say £50 via employer’s occupational pension scheme.

Three different methods of Pension tax relief

1. Basic rate tax Relief at source

Tax	Tax charged on gross salary i.e. £2,000
National Insurance Contribution (NIC) Both employer and employee	NIC charged on gross salary i.e. £2,000

In Basic rate tax Relief at Source scheme, pension company claims 20% tax back from HMRC and in case client is a higher rate tax payer, they will need to file a tax return and claim balance relief of 20% by increasing the basic rate threshold. Please ensure not to include employer’s contribution [link]. You should get details of your own contributions from your last payslip of the tax year.

No relief for extra NIC paid.

Please note NEST (UK State-sponsored) Pension scheme used by most small employer is a Relief at Source scheme.

2. Net pay arrangement

Tax	Tax charged on gross salary less pension deduction i.e. £2,000 – £50 = £1,950
National Insurance Contribution (NIC) Both employer and employee	NIC charged on gross salary i.e. £2,000

Relief for tax automatic as tax charged on wages less pension contribution but no relief for extra NIC paid.

3. Salary sacrifice: as per ITEPA 2003, section 308

Tax	Tax charged on gross salary less pension deduction i.e. £2,000 – £50 = £1,950
National Insurance Contribution (NIC) Both employer and employee	NIC charged on gross salary less pension deduction i.e. £2,000 – £50 = £1,950

Tax relief for both tax and NIC.

Thus, we will see that salary sacrifice method is the most beneficial way of contributing to employee pensions.

Limits to pension contribution

Contributions under Point 1 and 2 above can be between

Minimum             £2880 net 3600 gross

Maximum            Taxable earning of the employee

Note: Even when there are not taxable earnings like in case of non-working spouse, children or grandchildren. Minimum pension contributions can be made.

Under salary sacrifice scheme – Pension contribution can be higher than taxable earnings subject to Pension Annual Allowance, only condition is that director compensation (salary + pension) should be on commercial terms.

Note of Caution
Please note, these direct employer contributions are counted towards both Annual allowance and lifetime allowances.

• Conventional wisdom is running a business as a limited company is usually better than sole trader from tax perspective, not any longer see our calculator .

• Use Benefit is Kind like:
               Trivial Benefits
               Social Function
               Life Cover – _{Group Life Cover or Relevant Life Cover (for smaller companies)}
               One mobile phone per staff
                Tax free loans upto £10,000

• You may also our other blog re tax saving tips for PAYE individuals useful.
• Employing family members
• Shareholding to family members
• Buying a van instead of a car.
• Pensions¹ – see blog
• Renting part of home to the business.
• Charging interest on Director’s Loan Account
• Making use of Capital Allowances:
  Super Deduction
  Full expensing
• Ensure to check your NIC Record
• Sole traders can put excess funds in ISA or in an offset mortgage.
• Buying assets for capital appreciation in children’s name (Bare Trust)as Parental settlement rules are not applicable for CGT. See blogs from Aberdeen and Step Journal.

Notes:

1. Pension contribution lowers Income tax not National insurance contributions; unless it is salary sacrifice.

An event can be considered a social function and therefore exempt from tax and NIC if the following conditions are met:

1. It is annual (e.g. happening once a year, every year)
2. It is open to all employees, so everyone is invited
3. The cost per head is £150 or less

Examples: Christmas parties, Days Out, Summer BBQ parties etc.

Non-examples: retirement parties, long service award events, team building events, company celebration parties (e.g. company’s 50^th anniversary, etc.)

Note: The cost of £150 or less per head needs to meet the following conditions:

1. It is not an allowance (e.g. if the cost of a party is more than £150 per head, it needs to be reported in full and taxes apply for full amount)
2. It needs to include VAT
3. It can include cost of transport for employees to arrive at the venue
4. It can include overnight accommodation for employees

Notes:

1.  Guests or employee’s guests are added to the total number of attendees when calculating costs per person.

2.  Multiple annual events can be considered one single annual function if the combined costs of the events are no more than £150 per person.

Employers may need to apply for a PSA (PAYE settlement agreement) for entertaining from HMRC. For this they can write to HMRC wishing to apply for PSA, explaining what expenses are covered. HMRC will send them P626 to fill in.

If employers have a PSA for entertaining:

1. They should not put through Payroll for tax or NIC
2. They should not include on P11D
3. They should not pay Class1A, they should pay Class1B

Expenses and benefits included in a PSA must be one of the following:

1. Minor (e.g. birthday gifts)
2. Irregular (e.g. one off relocation expenses)
3. Impractical (e.g. shared car trip, taxi trip cost)

Source:
HMRC Webinars
Expenses and benefits: social functions and parties: Overview – GOV.UK (www.gov.uk)

HMRC Manual RDRM11570 states –

“The individual will have a 90-day tie for the tax year if they have spent more than 90 days in the UK in either or both of the previous 2 tax years immediately before the year under consideration.”

I was confused with the words “or both”. In my opinion purpose would have been solved without these two words. I looked at the legislation, see below.

Legislation FA2013 Sch 45 Para 37 states –

“P has a 90-day tie for year X if P has spent more than 90 days in the UK in—

(a) the tax year preceding year X,

(b) the tax year preceding that tax year, or

(c) each of those tax years separately.”

This increased my confusion, as what is the use of point c.

Then, I had the light bulb moment. Guidance and legislation are trying to be too perfect.

I have tried to illustrate this with a few examples below. Say we are doing SRT for taxpayer A for the year ended April 2023.

Example 1: If A was in the UK for 90 days in tax year ending April 2022.
This, satisfies point a of the legislation.

Example 2: If A was in the UK for 90 days in tax year ending April 2021.
This, satisfies point b of the legislation.

Example 3: Suppose we did not have point c of the legislation – “each of those tax years separately”. If A was in the UK for more than 90 days in both tax year ending April 2022 and April 2021, he would have satisfied both point a and point b but these are OR conditions. In our case as both are satisfied it can be construed that he would not have 90-day tie. To avoid this situation, point c was inserted.

For all practical purposes, A will satisfy the 90-day tie rule if he has been in the UK in ANY tax year ending April 2022 or April 2021.

This is a complex area; this article deals with the basics of RSUs.

RSUs are used by many US companies as long-term rewards linked to the share price of the company for employees.

There are two stages:

• Grant of Option: Usually, no income tax liability arises at this stage.

• Vesting of option: at this stage as employee actually receives shares at below market price, it is taxed as earnings* [Chargeable amount = MV of shares – consideration given, if any].
  
  *taxes payable income tax and national insurance both employee and employer.
  
  Usually, payroll department of the employer deals with the income tax via payroll. So, no further action required in SA return.

Capital Gains Tax

When shares acquired under RSU scheme are sold. Gains need to be computed and disclosed in SA return. Acquisition cost will be the MV of shares when RSU vested.

Further readings:
1. HMRC Manual ERSM20192 – 20194
2. Tolley Annual Income tax also has a good example in 70.17

Bonus
1. Some companies give cash bonus based on the share price, these are not RSUs they will be dealt via PAYE as normal bonus.

2. There are tax-advantaged employee share options as well like EMI, SAYE and CSOP we will cover them some other time.

Glossary

Grant Date – The date of agreement when employer promises to give shares in the future.

Vesting Date – The date on which employee becomes entitled to acquire shares after the fulfilment of pre-decided terms and conditions.

Exercise Date – The date on which the employee buys shares using the options.

Exercise Price – The price at which the employee gets the shares, usually lower than market value.