(d) Evaluate the effect on Gerard of the changes to be made by Fizz plc to its performance

Question

(d) Evaluate the effect on Gerard of the changes to be made by Fizz plc to its performance related bonus scheme.

You should ignore the effect of any pension contributions to be made by Gerard in the future, consider both

the value and timing of amounts received by Gerard and include relevant supporting calculations.

(5 marks)

Note: – You should assume that the income tax rates and allowances for the tax year 2006/07 apply throughout

this question.

Answer 1

正确答案：
(d) Implications for Gerard of the changes to Fizz plc’s bonus scheme
Value received
Under the existing scheme Gerard receives approximately ￡4,500 each year. This is subject to income tax at 40% and
national insurance contributions at 1% such that Gerard receives ￡2,655 (￡4,500 x 59%) after all taxes.
Under the proposed share incentive plan (SIP), Gerard expects to receive free shares worth ￡3,500 (￡2,100 + ￡1,400).
Provided the shares remain in the plan for at least five years there will be no income tax or national insurance contributions
in respect of the value received. Gerard’s base cost in the shares for the purposes of capital gains tax will be their value at
the time they are withdrawn from the scheme.
In addition, the amount he spends on partnership shares will be allowable for both income tax and national insurance such
that he will obtain shares with a value of ￡700 for a cost of only ￡413 (￡700 x 59%).
Accordingly, Gerard will receive greater value under the SIP than he does under the existing bonus scheme. However, as noted
below, he will not be able to sell the free or matching shares until they have been in the scheme for at least three years by
which time they may have fallen in value.
Timing of receipt of benefit
Under the existing scheme Gerard receives a cash bonus each year.
The value of free and matching shares awarded under a SIP cannot be realised until the shares are withdrawn from the
scheme and sold. This withdrawal cannot take place until at least three years after the shares are awarded to Gerard.
Accordingly, Gerard will not have access to the value of the bonuses he receives under the SIP until the scheme has been in
operation for at least three years. In addition, if the shares are withdrawn within five years of being awarded, income tax and
national insurance contributions will become payable on the lower of their value at the time of the award and their value at
the time of withdrawal thus reducing the value of Gerard’s bonus.