Employment related share options
Written by Ray Coman
Company share options, particularly if contingent on a minimum length of service, are often granted with the intention of inspiring loyalty and incentivising staff to contribute to the financial performance of the business.
Many share option plans made by companies will not meet the requirements for preferential tax treatment. Where the value of such shares is higher on the exercise date than the strike price, this profit element will be treated as employment earnings.
When the shares are eventually sold, the gain is calculated by deducting the price paid for the shares from sales proceeds.
National Insurance Contributions (NICs) are charged on readily convertible assets. NIC is therefore charged where the shares are listed, or where there is an arrangement for the shares to be acquired as part of a takeover.
Tax and NIC due on the exercise or award of unapproved shares is deducted by PAYE. Where this is not possible, for instance because the tax exceeds monthly pay, the tax is payable by the employee within 90 days. If the tax is not paid it will be treated as a taxable benefit in kind.
The employee may pay the employers’ NIC on the share remuneration. This secondary NIC is deductible from taxable employment earnings. However, the employers’ NIC paid is not deducted from the amount liable to primary NICs, nor is it added to the cost of the shares for the purpose of calculating capital gains tax.
For unapproved options, if the employee was not UK resident when the option is granted, there will be no tax on exercise. If the employee is non-resident when the shares are exercised, relief will be given for the proportion of holding period spent in employment outside the UK.