Sorting out family member tax - voluntary pension contributions.

oz0707

I need help to sort a family members tax. I'm trying to work out if they need to contribute extra to the pension to fly under the higher tax rate. Details are below if anyone could look over it be appreciated.

incomings
Salary £58,880
Company car payment £4800 p/a
-£63,680 excl bonuses

Performance bonus - Averaged 3% in prev years
Management share options yearly where are given a certain amount at a certain price, if the share price improves they pocket the difference
Sharesave scheme

outgoings
nursery fee's (salary sacrificed) £12,994.80

So I assume the share save scheme is treated as capital gain? Likewise I am assuming the management shares are too, although less sure here? For some reason the first year of them is classed as 'tax advantaged' and you don't seem to get taxed on these but that doesn't seem right. Unless it has to do with being there a certain amount of years accumulating and capital gains allowance?

Pretty sure the bonus will be treated as salary.

So assuming the nursery fees being salary sacrificed reduces the taxable basic income to £50,685.20

So each year they need to either put £415.20 into pension to avoid higher rate tax (plus the whole bonus, if applicable)
Or
£685.20 (plus the whole bonus, if applicable) to stay in receipt of full child benefit.

Am I on the right track here?

Thanks

 

Jeremy535897

Nursery fees paid for by the employer are taxable unless they joined an approved scheme on or before 4 October 2018:
https://www.gov.uk/expenses-and-benefits-childcare/whats-exempt
https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim21687

If the rules on share save are followed, only capital gains tax is payable:
https://www.gov.uk/tax-employee-share-schemes/save-as-you-earn-saye

Management shares may be EMI:
https://www.gov.uk/tax-employee-share-schemes/enterprise-management-incentives-emis
Whether there is any income tax depends on whether the shares are issued at a discount.

If the additional pension contribution is by the employee, it is paid net of basic rate tax, so £332 is required (assuming that the childcare is non-taxable, and the shares are exempt). If child benefit is an issue, the net amount to be paid is £50,685 - £50,100 = £585 x 80% =£468.

oz0707

Jeremy535897 said:

Nursery fees paid for by the employer are taxable unless they joined an approved scheme on or before 4 October 2018:
https://www.gov.uk/expenses-and-benefits-childcare/whats-exempt
https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim21687

If the rules on share save are followed, only capital gains tax is payable:
https://www.gov.uk/tax-employee-share-schemes/save-as-you-earn-saye

Management shares may be EMI:
https://www.gov.uk/tax-employee-share-schemes/enterprise-management-incentives-emis
Whether there is any income tax depends on whether the shares are issued at a discount.

If the additional pension contribution is by the employee, it is paid net of basic rate tax, so £332 is required (assuming that the childcare is non-taxable, and the shares are exempt). If child benefit is an issue, the net amount to be paid is £50,685 - £50,100 = £585 x 80% =£468.

Thanks for the reply i should have specified the nursery is on site and ran by the employer. I'm pretty sure looking at the payslip the nursery fees are deducted before tax and NI

oz0707

Also for clarity the pension is a workplace type scheme. The contributions are listed on the payslip as before tax and NI

Jeremy535897

Assuming that the EMI shares were not acquired at a discount, and assuming the employee makes the additional pension contribution (rather than sacrificing more salary), the figures I mentioned in my first post should be OK.

oz0707

Jeremy535897 said:

Assuming that the EMI shares were not acquired at a discount, and assuming the employee makes the additional pension contribution (rather than sacrificing more salary), the figures I mentioned in my first post should be OK.

Cheers. I don't understand the pension contributions being paid net or at 80% when they seem to appear on the payslip as before tax (sacrifice?). Can't I just work with the gross figures in this case?

I will get them to send me a pdf or some information on the management shares although I suspect they might be listed as share incentive plans on that link you posted as the company is FTSE listed, not below 30m.

I'm assuming you agree that the whole bonus would need to be contributed to pension?

Jeremy535897

As I said, if the extra pension payment is made via salary sacrifice, you use the gross figure. That is because the employer makes the contribution, and they don't pay net of basic rate tax. If an employee makes a direct contribution, then it is made net of basic rate tax. I don't know whether the employee will have the option of salary sacrifice. I agree the bonus figure needs to be included in the extra pension payment, and £50,100 is the relevant figure to get adjusted net income down to.

oz0707

Many thanks. I was concerned a lot more would need to be routed into pension but it seems the nursery salary sacrifice sorts most of this for them. 

oz0707

Bit more info on the management shares
The original tranche are tax advantaged and the later ones are non tax advantaged.
None are exercisable for a few months then yearly afterwards.
I am assuming the original tax advantaged ones will not effect the calculations as only attract CGT
With the non-tax advantaged ones will it be a case of sacrificing an additional contribution to the pension which equals the profit from exercising the options?

Jeremy535897

Anything subject to income tax will add to adjusted net income, and therefore require additional contributions. Don't forget that there is an annual allowance of £40,000 that can be put into the pension scheme (by both employer and employee combined), unless there are unused allowances brought forward.

oz0707

Cheers I don't think they would broach the 40k of contributions.
I read through the information pack they got and tax and NI is deducted via PAYE before the funds are paid over, if you decide to exercise AND sell the options. Would it be as simple as making a voluntary one-off contribution the following payroll month to adjust the amounts. Will the tax codes sort this out before the year end or I am guessing they will have to start submitting self assessment to get refunded?