UNAPPROVED COMPANY SHARE SCHEMES
 The simplest ways of offering share ownership to employees are, unfortunately, also the least tax-efficient. As normal in the world of tax, tax breaks are accompanied by regulation, and escaping detailed Inland Revenue rules means paying more tax.
Unapproved Share Schemes
If an employer simply gives shares to an employee, the value of those
shares is treated as wages, so that a PAYE and NIC liability arises
on the market value. The employee can of course subsequently receive
dividends on the shares without PAYE or NIC costs, but the initial
set-up cost for both employer and employee is high.
If the shares are not given to the employee for free, but sold at a
discount or undervalue, the result is much the same, except that it
is only the discount that is taxed as income.
Unapproved Option Schemes
The next simplest
method is to grant options to employees enabling them to purchase
shares at a reduced cost. There will (in virtually all circumstances)
be no PAYE or NIC charge at the time of grant, but income tax will be
due when the employee exercises his option and acquires the shares.
What is charged to tax is any difference between the
market value at the option date and the amount paid for the shares.
PAYE and NIC are due if the shares are a “readily convertible asset”
(which has a fairly wide definition, so it is always wise to assume
that shares in a company will be readily convertible assets). If the
scheme rules permit, the employer can require the employee to meet
the cost of both primary and secondary Class 1 NI Contributions
(this is the only circumstance in which it is ever legal for an
employee to pay an employer’s NIC costs). Whether
the scheme used is a share scheme or an option scheme, unapproved
schemes are simple to implement but make no initial savings in tax.
The only employees likely to gain any benefit from unapproved schemes
are those who are not UK resident for tax purposes. For the vast
majority of employees and companies, the use of some form of approved
scheme is essential.
|
