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Tax - Wheres the incentive to earn more

Discussion in 'Careers, Employment and Professional Development' started by smeemi, 15 Jul 2021.

  1. smeemi


    Joined: 8 Jan 2010

    Posts: 636

    Given how interest rates are rock bottom at the moment, maximum RPI.

    Plan 1 was £3k pa fees and 1% interest rate.

    Plan 2 is £9k pa fees and 5.6% interest rate (and will rise as inflation expectations now are much higher)
  2. Uther


    Joined: 16 Jun 2005

    Posts: 16,581

    Did your extra education help get you to where you are today? Personally I'd just pay it off with your rather large pay packet and consider just how lucky you are to be in that position.
  3. dowie

    Capo Crimine

    Joined: 29 Jan 2008

    Posts: 53,112

    Fair enough, I’m not an accountant, I’m curious though, how so?
  4. Pudney


    Joined: 6 Sep 2005

    Posts: 5,627

    Location: Essex

    First off the basis premise is that an employee is taxed on everything of value they've been given in return for their services.

    If we just taxed as employment income the value of the share option at the date of grant it gives the opportunity for an employer to artificially deflate the value of the option through conditions in the option itself (e.g. only exercisable if Mr Smith comes into work on Saturday 4th June 2022, and obviously there's nothing to prove this is pre-determined). Even without attempts to artificially deflate the value, you can easily remunerate staff with exit options (i.e. those which are only exercisable on the sale of the business) that would have limited value at the date the employee gets the option. A share option that is not tradeable and can only be exercised at some undetermined point in the future is really not that valuable. The end result is that you can reward someone for their services with an end value charged at the far more beneficial CGT rates if we just taxed the option value at the date of grant. This is contrary to the basic principle that employees are taxed on what they receive in return for their services.

    Obviously you can achieve the aims of what you suggest using an approved scheme. These are specific rules that show the intent of the government to give a more generous treatment, much like how employees aren't taxed on employer contributions to a pension scheme. This should be the flag that says the government doesn't want to treat taxing the value of the option at grant as the standard, not because of complexity (taxation doesn't shy away from complexity), but because it's a matter of public policy to maintain the status quo that employees are taxed on the value of what they receive in return for their services. And as a matter of public policy, the government has decided there should be limitations on how generous these incentives should be, whether it's by reference to the size of the employer, size of the options granted, the business activity of the employer or something else.

    As a final point of note, at one point following a House of Lords decision (in 1961) options were taxed at the date those options were acquired. The government explicitly reversed this using legislation, so it is clear the intent is to charge the value received by an employee once an option is converted into some other asset.

    Edit: I waffled a bit, so the TLDR is: make the share option worthless and the resulting share valuable.
  5. dowie

    Capo Crimine

    Joined: 29 Jan 2008

    Posts: 53,112

    Sorry but I disagree here, the first example is some rather arbitrary clause that I don't think does make the option worthless, it would certainly be objectionable if they tried to claim it did - you're just throwing in some knockout event that screws over an employee if they're sick or pregnant (rather discriminatory and so potentially illegal). Alternatively, if they leave the company before then then meh...

    The second condition isn't necessarily artificial either, such an option *should* have a lower value... if the company doesn't get sold before they expire then they're worthless. I don't think this clause would generally be attractive to employees thus defeating the point of granting these options.

    Like you said, this is the principle:

    The value of the option is its premium, what it would be worth if you simply bought it... so surely the tax you'd otherwise pay on the income you'd need to earn to buy the thing you're given as part of your income is what ought to be applicable. Just as it would be for gym membership or health insurance etc.. or maybe a company decides that after 10 years of employment an employee gets to be awarded an expensive watch or something, that would need to be taxed and/or the employer might throw in some additional cash so as to cover that too.

    Say some employee has options that expire in 4 years, the company does spectacularly well, instead of simply paying tax and NI on the value of the options when they were earned, the employee is taxed on the gain, from the strike price to the, now much higher after 4 years, current value.

    Two issues - first of all, HMRC is collecting income tax and NI on a speculative gain that occurred long after the thing of value was earned, that seems to go completely against the premise you mentioned and is more what CGT is for (which obvs applies here too in addition to income tax and NI should they sell the shares).

    Secondly, this additional speculative gain has accumulated over several years but is taxed, as income, in a single tax year. Hello higher tax bracket for even lowly paid QA, admin staff or support guys and goodbye personal allowance for otherwise not yet on 6 figures, early-career developers/engineers etc..

    In the latter case I could perhaps see the argument that, where because you have say the presence of some clause that the employee is locked into working for the company for the 4 years then maybe it could be considered income across 4 years and somehow taxed as if the total gain was earned across 4 tax years, though I still think that is a fudge as it still involves the taxing of additional speculative gains as income.
    Last edited: 23 Jul 2021
  6. Pudney


    Joined: 6 Sep 2005

    Posts: 5,627

    Location: Essex

    I think you're missing the point of the clause. It isn't to screw over the employee. It's to screw over the valuation. My example is a bit silly, but the principle of it is sound (and the principle gets abused even now with current rules).

    It's pretty attractive to employees... It's one of the main ways to do an EMI scheme. In fact a couple of EMI schemes I set up a couple of years ago as exit only have recently been triggered, happy employees!

    There's a lot of errors in the above which is leading to flawed conclusions. It's not the easiest thing to explain over text (which is why I have these types of discussions in person..) But as an attempt:
    • My point is if we are only taxing as Employment Income the option premium the sensible thing to do would be to trash the value of the premium up front.
    • Taxing the employee on the increased value after 4 years is eminently sensible because... the share is worth a lot more than the option was.
    • A share option is an asset.
    • A share is an asset.
    • A share option and a share are not the same asset.
    • You aren't normally taxed on the share option (you could be if, for example, you sold the share option to someone else), but you are taxed on the share. This is a matter of design and policy.
    • The base cost of the share for CGT purposes is the value of Income Tax purposes, so if you gain a share after 10 years, are taxed to income on the market value on that date, and sell the share straight away at market value no CGT would be payable (proceeds = base cost).
    • Yes higher rates of income may be payable. But, and this is important in this thread as well, that's what happens when you gets lots of money from your employer.
    • Tax doesn't necessarily care whether something is earned over a number of years. In this context, all that is important is the asset was earned by reason of your employment. Sometimes there are exceptions to this rule (looking at you Top Slicing Relief).
    Anyway, obviously you don't like the fact share options are taxed in this way and that's fine. But I can absolutely guarantee you it's not because HMRC/accountants don't understand options. Which was the important part why I posted! :D
  7. dowie

    Capo Crimine

    Joined: 29 Jan 2008

    Posts: 53,112

    I thought you'd perhaps provide a real-world example if this is an obvious risk though, I mean if you do something that negatively affects the value of the option then sure the option isn't worth as much! But say I accept for the sake of argument that there is some obvious way of doing this that is clearly underhand then perhaps it is better to rule out that underhand, false devaluation. Either way, it is more the principle I'm objecting to not a secondary issue of how best to tackle avoidance, tackling avoidance by treating people unfairly might be a solution to the avoidance but the objection re: the (IMO) unfairness is still there.

    LOL fair, that was rude of me though the objection still applies regardless of my perhaps unfair speculation/hyperbole re: the reason, a policy decision has been made to not tax options based on their value at the time they were earned, it's not just that I don't like that they're taxed this way I think it is fundamentally flawed and goes against the principle of how income is otherwise taxed. There might well be an anti-avoidance issue here, suppose I accept that there is a massive avoidance issue for the sake of argument that doesn't mean that this solution, which might well solve the avoidance issue, is necessarily fair.

    Suppose for the sake of argument that, aside from setting the strike price and expiry employers were only permitted to have a clause re: continued employment by the time of expiry.

    Say I work for ABC PLC, say they're a publicly-traded company, I could, with my salary, buy some (publicly traded) options right now.

    Firstly, I'm taxed on the income I use to pay the premium to buy those options. Yes share options and shares are different assets as you point out but my tax liability doesn't kick in at expiry, it kicks in when I dispose of the shares, importantly - I might want to hang onto them. If the shares shoot up then I have a taxable gain when I sell them above the value of the option premium + cost of shares when exercised, if instead the shares later fall below that amount I might have no GCT or indeed an allowable loss. Likewise, if my options expire worthless, I have an allowable loss for GCT purposes.

    Conversely, if I'm instead granted options in ABC PLC, I don't get to simply pay income tax an NI on the premium. If the shares shoot up in value then I have a potentially rather large tax liability at expiry + despite this being a speculative gain I'm not charged CGT but am charged income tax and NI on it. If I want to hold the shares I'd best find a way to fund my tax bill, if the shares carry on rising then I have a capital gain on the remainder, but if they subsequently fall, I now have an allowable GCT loss that doesn't offset the income tax I've paid and/or might not be of any use if I have no other GCT liability. I was charged income and NI on a speculative gain that, had I bought the options myself, I wouldn't have been deemed to have realised yet + of course that income and NI is charged at a higher rate than CGT. Also if the options expire worthless I don't have a GCT loss or any NI or income tax to pay, they've basically been treated as though they have no value at all through this whole process unless they happen to expire in the money.

    There might well be an argument that there is some risk of tax avoidance but that, IMHO, is a tangential issue and doesn't in itself address the objection re: the principles in how this policy is implemented. I get that you're a tax expert but the question of whether some policy is right or wrong is more of a question of principles, if there are some technical issues incorrect then fine I can accept that but the argument about right/wrong here is more of an opinion one albeit there do seem to be some obvious inconsistencies in how this works: awarding an option and not being taxed on the value of it at that time vs buying options yourself with your (net) salary. :)

    edit - thrown in spoiler tags for the above as that got a bit waffly:

    tl;dr I guess my objections are that HMRC essentially ends up pretending that the option has no value for income tax purposes at the time you earn it, and pretends that you lost nothing of value in terms of allowable CGT losses the event it expires worthless too.

    And that they instead seek to charge you income tax and NI on a speculative gain if that gain occurs which seems unfair because:

    1) you'd otherwise be potentially liable for GCT at a lower rate (if you sold at expiry)
    but also
    2) wouldn't be liable for tax at that point if you wished to hang onto the shares.
    3) if the shares subsequently fall you've already paid income tax and NI on a speculative gain that wouldn't have otherwise been deemed to have been realised but (this last bit you might well correct me on) any subsequent loss from that point doesn't get to offset that but instead, would appear to offset CGT at a lower rate and might not be utilized(???)
    (or is there some special rule whereby subsequent losses from holding the shares after exercising the option get to be offset against income?)
    Last edited: 23 Jul 2021
  8. chrcoluk


    Joined: 27 Feb 2015

    Posts: 8,159

    I would accelerate the payment of plan 2.

    That £3400 you shrugged off as not worth it goes some way to doing that on top of your normal salary.
  9. Spook187


    Joined: 16 Jan 2010

    Posts: 8,422

    Location: Cumbria

    This thread made me lol, how much in bonus and wages pleading poverty,get a grip, nothing but pure greed, I think the op needs a shake or booted up the street :D
  10. Mellowfellow


    Joined: 11 Feb 2021

    Posts: 39

    Location: Tunbridge Wells

    I don't know if anyone has suggested this to you but if you have a company pension ask your employer to put bonuses directly into it so it's not taxed . It's a bit galling that a bonus that's not guaranteed is taxed like salary.
    I hope this helps
  11. Freefaller

    Man of Honour

    Joined: 5 Jun 2003

    Posts: 87,685

    Location: Falling...

    Wait till you have kids, or earn over 100k (you basically get 0 benefits for childcare etc...).

    Once you've paid off your student loan it does feel better. If I had been earning as much as you so young, I'd tell myself to do a significant salary sacrifice pension contribution and / or other form of pension and future planning contribution,.
    Last edited: 27 Jul 2021
  12. Semple


    Joined: 5 Mar 2010

    Posts: 8,719

    You could always blame your parents for not conceiving you a few years earlier that would have allowed to you attend university under plan 1*.

    *i jest of course
  13. tlrBeta

    Wise Guy

    Joined: 1 Jul 2008

    Posts: 1,966

    Location: Birmingham

    Really was expecting more then a CA, very disappointed.

    They already helped him enough by looking at his story :D
  14. rIcK

    Wise Guy

    Joined: 5 Jan 2004

    Posts: 1,459

    My student loan interest was basically 0% interest after I graduated and started earning I think it was mostly gone after ~6 years, I think my uni fees were the last year of £1000 per year.

    The current system is a complete scam. I think as a country we pay as much towards education as we did 10 years ago since much of the debt gets written off anyway, so why don't we just make the whole system fairer if it costs us the same anyway?

  15. AHarvey


    Joined: 6 Mar 2008

    Posts: 10,049

    Location: Stoke area

    This has to be the worst "look how much I earn!" post I've seen on here in quite some time :D
  16. Simon


    Joined: 21 Oct 2002

    Posts: 24,293

    Location: Berks / Moscow

    How big is this loan ??
  17. MichaelAwkward


    Joined: 22 Jul 2014

    Posts: 3,599

    Location: Oxon

    Here's my plan 2 for comparison:


    OP did come across quite badly and is in a fortunate position compared to an average graduate like me, but some of the responses in this thread attacking him are missing the point of how absurd the system is. I'd need to more than double my salary (although it has gone up a bit over the last year already, humblebrag) to have any hope of paying it off before the 30 years is up, which is do-able in my line of work but why shouldn't I legally arrange my finances in a way to minimise what I pay back, after the past year of acceptable, blatant corruption by the people who decide those rules?
    Last edited: 31 Jul 2021
  18. mid_gen


    Joined: 20 Dec 2004

    Posts: 11,843

    Frankly, I don't have a problem with the interest rate. It's not unreasonable, if you're going to make people pay for it.

    If it was down to me I would abolish fees for core STEM and any in-demand disciplines....but anyway....

    The problem really with plan 2, is that the default repayments don't cover the interest. We're taking a whole swathe of the population's first experience with debt, and showing the absolute WORST way to manage it. It's like we're training a whole generation to spend their whole life in debt.

    Maybe that's the plan?

    Just put the repayments up to cover interest + X.
  19. Dr House


    Joined: 17 Oct 2002

    Posts: 13,261

    Location: London / Prague

    The system is quite broken, a parent with a 3-year-old as a contractor (inside IR35)

    Total income £112,500 = take home £66,700 plus get 30h free child care (value £11k pa)

    work full time

    Total income £165k, take home pay is £87,800 loss of free child care makes take home £76,800 but because you are at work more you need to pay full-time nursery which is £22,800 pa so true take home £65 000.

    So there is no incentive to work past £112k.
  20. Simon


    Joined: 21 Oct 2002

    Posts: 24,293

    Location: Berks / Moscow

    How does a contractor get 30hr free childcare on over 100k ?

    You also get 15hrs a week for the lower example.

    you aren’t even comparing the same things yet claim no point earning over some random number that has nothing to do with childcare costs.

    contractor vs permie
    Different hours
    Last edited: 3 Aug 2021