Employment Advance

1. Share Incentive Plans (SIPs)

Tax Benefits:
 No income tax or NICs if shares are held for ≥5 years.
 Capital Gains Tax (CGT) applies only on sale, with the base cost being the market value at withdrawal.
Conditions:
 Must be offered to all employees with >18 months of service.
 Maximum annual share value: £3,600 per employee.
 Must be held for 5 years for full tax relief.
Early Withdrawal Penalties:
<3 years: Income tax + NICs on full market value at withdrawal.
3–5 years: Income tax + NICs on the lower of:
o Original market value at award, or
o Market value at withdrawal.
Example: If shares worth £2 are sold after 4 years at £6, tax is due on £2 per share.

2. Approved Share Option Schemes

Types:
1. Enterprise Management Incentive (EMI): For small companies (<£30M assets, <250 employees). Max £250,000
per employee. Tax:
 Income tax on discount at grant (MV – exercise price).
 CGT on sale (MV at sale – MV at grant).
2. Company Share Option Plan (CSOP): Max £60,000 per employee. Similar tax treatment to EMI but with stricter
limits.
3. Save As You Earn (SAYE): Employees save £10–£500/month for 3–5 years to buy shares at a discount (≥80% of
MV). Tax-free if held for ≥3 years.

3. Lump Sum Termination Payments

Tax Treatment: First £30,000 is tax-free (covers statutory redundancy). Excess is taxable as employment income.
Payments in Lieu of Notice (PILON):
o Contractual PILON: Fully taxable.
o Non-contractual PILON: Tax-free up to £30,000, excess taxable.
Example:£22,000 statutory redundancy + £48,000 ex gratia = £40,000 taxable (after £30,000 exemption). £30,000 PILON
= fully taxable.

4. Personal Service Companies (PSCs) & IR35 Rules

IR35 Rules: Prevent tax avoidance by workers using PSCs to disguise employment. If IR35 applies, income is treated as
a deemed salary, subject to income tax + NICs.
Key Scenarios: Small Client: PSC calculates deemed salary.
Formula: Income – 5% deduction – salary – employer NICs = deemed payment.
Medium/Large Client: Client determines IR35 status and deducts tax/NICs.
Example: PSC earns £80,000, pays £35,000 salary → deemed salary = £32,888 (taxable).

Self Employement Advance

1. Transfer of a Business to a Company
Loss Relief Conditions:
≥80% of consideration must be in shares. Seller must hold shares for the tax year. Company must continue the business.
Relief Method: Unrelieved trading losses can offset dividends or other income from the company.
Example:
Business sold for 10,000 shares with £20,000 losses. Dividends of £8,000 received → £8,000 loss relief claimed.
2. Annual Investment Allowance (AIA) for Related Companies
Rules:
Related companies (same owner + same premises/activities) must share £1M AIA.
Unrelated companies get full £1M each.
Group companies (parent + subsidiary) share one AIA (flexible allocation).
Example: If two companies are run from the same home, they share AIA.

UK Tax Treatment for Jointly Held Assets, Savings Income, and Trusts
This document covers the tax implications of jointly owned property, savings income paid net of tax,
and income from trusts. Below is a structured summary:

Jointly Owned Property by Married Couples/Civil Partners

Default Rule:
Income is split 50:50 unless a declaration of beneficial interest is made to reflect actual ownership.
Objective: Tax efficiency by allocating more income to the lower-earning spouse to utilize personal allowances and lower
tax rates.
Key Points:
Transfers of ≥5% ownership can legally shift income allocation.
Example:
Property income: £100,000.
Husband earns £100,000 (higher-rate taxpayer); wife earns £0.
Without declaration: £50,000 taxed at 40%/45% (husband) + £50,000 at 20% (wife).
With declaration (100% to wife): £100,000 taxed at 20%/40%, saving £6,325 in tax.
Exceptions:
Joint bank accounts: Always taxed 50:50.
Dividends from shares: Split according to actual ownership (not 50:50).

2. Savings Income Paid Net of Tax

Tax Treatment:
Most interest is paid gross, but some (e.g., company interest) is paid net of 20% tax.
Grossing up: Net interest is converted to gross by multiplying by 100/80.
Tax credit: Deducted from the taxpayer’s liability (equal to the 20% withheld).
Example:
Net interest received: £16,000 → Gross = £20,000.
Tax credit = £4,000 (20% of £20,000).
If taxpayer’s liability is £7,800, net payable = £7,800 – £4,000 = £3,800.

3. Income from Trusts

Types of Trusts:
Interest in Possession (IIP) Trusts:
o Beneficiary (life tenant) has a right to trust income.
o Income is distributed net of 20% tax and taxed at the beneficiary’s rate.
Discretionary Trusts:
o Trustees decide distributions.
o Income is deemed net of 45% tax (even if not distributed).

Taxation Rules:

IIP Trusts:
Life tenant reports gross income in their tax return.
 Example: £5,000 dividends → Taxed at 33.75% (higher rate) after £500 dividend allowance.
Discretionary Trusts:
Beneficiary grosses up income (×100/55) and claims 45% tax credit.
Example: £10,000 received → Gross = £18,182; tax = £8,181 (45%), but credit cancels liability.
Key Differences:
Aspect IIP Trust Discretionary Trust
Income Rights Guaranteed for life tenant At trustees’ discretion
Tax Withheld 20% 45%
Taxation Timing Taxed when entitled (not received) Taxed when received

UK Tax Rules: Personal Allowance Allocation, Minor Children’s Income, and Investment Reliefs
(EIS/SEIS/VCT)

1. Allocation of the Personal Allowance

The £12,570 personal allowance (PA) should be allocated to the most tax-efficient income type to minimize liability.
Priority order for PA allocation:
1. Dividend income (to utilize the 0% dividend allowance first).
2. Savings income (to preserve the 0% starting rate band for savings).
3. Non-savings income (e.g., pensions, employment income).
Example: Income: Pension (£8,000), Savings (£4,500), Dividends (£9,000).
Optimal allocation: PA covers £8,000 (pension) + £4,570 (dividends).
Remaining dividends (£4,430) use the £500 dividend allowance (0%), then taxed at 8.75%.
Savings income (£4,500) benefits from the 0% starting rate (first £5,000 of taxable income).
Result: Total tax = £344 (vs. higher tax if PA offset savings first).
2. Tax Treatment of Minor Children’s Income
General Rule: Children are taxed on their own income (e.g., gifts, trusts) and have their own PA.
Exception: If income is from parent-provided capital (e.g., bank account, trust) and exceeds £100/year, it is taxed on
the parent (not the child).
Example: Parent opens a bank account for a 2-year-old with £2,000 annual interest. Tax outcome: Parent declares the
£2,000 (covered by their PA, so no tax due).

3. Tax Reliefs for Investments (EIS, SEIS, VCT)

A. Enterprise Investment Scheme (EIS)
Relief: 30% of investment reduces income tax liability. Conditions:
o Invest in new shares of unquoted trading companies.
o Investor must own <30% of the company.
o Max relief: £300,000/year (£1M investment cap).
Penalty: Relief clawed back if shares sold within 3 years.
Example: Invest £30,000 → £9,000 tax relief (30%).
B. Seed Enterprise Investment Scheme (SEIS)
Relief: 50% of investment reduces income tax. Conditions:
o For early-stage companies (smaller than EIS).
o Max relief: £100,000/year (£200,000 investment cap).
Penalty: Relief clawed back if sold within 3 years. Example: Invest £30,000 → £15,000 tax relief (50%).

C. Venture Capital Trusts (VCT)

Relief: 30% of investment reduces income tax. Conditions:
o Invest in VCT-listed shares.
o Max relief: £60,000/year (£200,000 investment cap).
o Dividends from VCTs are tax-free.
Penalty: Relief clawed back if sold within 5 years. Example: Invest £30,000 → £9,000 tax relief (30%).