Written by Ray Coman
It is common for an employee to receive shares or share options in their employer’s company. The share remuneration is as a reward, performance incentive and loyalty encouragement for the workforce.
Readily convertible assets
The tax treatment of a share award depends on whether the shares are readily convertible assets. Shares which can be immediately sold on the open market, (i.e. listed on the stock market) are readily convertible.
The gift of shares by an employer in a company which is a listed company, also known as a Plc, will be subject to primary and secondary Class 1 NIC. Most typically, the remuneration is processed through the company payroll and tax and national insurance is deducted at source.
The employee may not have sufficient earnings for the month, or pay period in question, to meet the tax liability arising from a share award. For most income on which tax is collected at source, the tax deducted cannot exceed 50% of gross pay. However, for readily convertible assets there is no such restriction. Therefore, if there is not enough net pay to settle the tax due on the shares, the employee would have to make good the difference. If the tax is not paid within 90 days, it will be treated as a taxable benefit paid by the employer.
Typically, an arrangement will be reached where so much of the shares are sold as to pay for the tax due on their award.
A share in an unquoted company, where there are no arrangements to sell this company, will not be regarded as readily convertible. Such shares will be will be treated as a benefit subject to Class 1A NIC. Tax would either be collected by a change to PAYE code or via a Tax Return.
Tax advantaged share schemes
Employment related securities offer employees a share in the financial success of the company towards which they are contributing. To encourage share ownership in the employer’s company, there are four main tax saving schemes in which a company can participate:
These four plans are explained in the related links.