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Employee Share Schemes: UK Tax Implications

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Introduction to Employee Related Securities

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Understanding Employee Related Securities

Employee Related Securities (ERS) pertain to shares or options offered to employees as part of their compensation.

In other words, part of an employees salary is made up of shares in the company they work for.

ERS schemes can include, but are not limited to, Share Incentive Plans (SIPs), Save As You Earn (SAYE) schemes, and Company Share Option Plans (CSOPs). Each scheme has distinct tax considerations under UK law, which are crucial for both the employer and employee to understand. 

Types of Share Schemes

Employee share schemes generally fall into four main categories:

  • Share Incentive Plans (SIPs)
  • Save As You Earn (SAYE)
  • Company Share Option Plans (CSOPs)
  • Enterprise Management Incentives (EMIs)

Legislative Framework

The legislation governing these schemes includes the Income Tax (Earnings and Pensions) Act 2003 and the Taxation of Chargeable Gains Act 1992, which outline the tax treatment of employee shares and securities.

Valuation of Shares

Share valuation for tax purposes is a complex process, involving market considerations and HMRC regulations. Valuing unlisted shares typically requires agreement with HMRC’s Shares and Assets Valuation division to ensure tax accuracy. Disputes may arise from differing interpretations of value, but HMRC guidance and precedents offer a framework for resolution. 

The methods of share valuation for tax purposes often include intrinsic value assessment, earnings multiples, or an analysis based on comparable company metrics. 

HMRC’s Shares and Assets Valuation Division

HMRC’s Shares and Asset’s Valuation Division helps determine the market value of shares for tax purposes. Employees involved in share schemes must be aware of HMRC’s valuation rules to avoid potential disputes. These valuations can impact the tax payable under schemes such as EMI, CSOPs, or SIPs. 

The valuation of shares directly impacts the income tax an employee must pay upon acquiring the shares. If shares are undervalued, the employee must face a larger tax liability when sold at market value. 

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Chargeable Events

Chargeable Events in Employee Share Schemes (ESS) occur when participants acquire shares. This often results in them owing tax, when the shares go up in value from the price the employee initially paid. This should be included in their income tax calculations.

When selling these shares at a profit, there will be a Capital Gains Tax liability.

Reporting Requirements & Payment of Tax on Chargeable Events

Upon a ‘chargeable event’, such as acquiring shares below their market value, employees must report to HMRC. This can be payable via Self-Assessment or through PAYE, dependent on the scheme’s setup. 

Approved vs. Unapproved Share Schemes

HMRC-approved share schemes offer tax advantages, such as no income tax on acquisition within set limits. Common types include Share Incentive Plans, Save As You Earn and Enterprise Management Incentives, each with specific eligibility criteria and tax benefits under the ITEPA 2003 and associated legislation. 

Approved share schemes offer significant tax benefits by potentially reducing or deferring income tax and National Insurance liabilities for employees when acquiring shares.

The risk of unapproved share schemes include potential higher tax liabilities and complex administration. However, rewards can be substantial with fewer restrictions on eligibility and share types, offering greater flexibility and potential for higher gains. 

Reporting Requirements and Deadlines

Income Tax (Earnings and Pensions) Act 2003 mandates that employers report share acquisitions by employees to HMRC. Such reporting is done through an Employment Related Securities (ERS) return and is due by the 6th of July following the end of the tax year in which the shares were acquired. 

To begin the formal advisory process regarding tax implications of Employee Share Schemes, please use the contact form below to organise a free 15 minute consultation with one of our Senior Partners. 

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