During your employment, there may be a point in time when your employer wishes to reward you. This could come in the form of remuneration, benefits in kind, but could also be in the form of some shares or share option. The treatment of these options should be considered carefully. For more detailed analysis of what is being offered and the tax implications, it is recommended you seek guidance from chartered tax advisors.
In the UK, there are two categories of share schemes that may be operated. These are unapproved and approved (this meaning that the scheme has been approved by HMRC). Although there will be more detailed descriptions below, the approved route provides more tax benefits relative to the unapproved scheme, although unapproved options offer greater flexibility to employers.
Unapproved Share Schemes
When an employer grants an employee an option, it will usually be at a value less than the current market value. This immediately gives rise to a taxable benefit and it is the difference between the market value and the price the options are granted that the employee will have to pay income tax on. This income tax charge will become chargeable on the employee at the date of acquisition (for shares) and date of exercise (for share options).
When these shares are disposed of, if sold at a profit, then a chargeable gain will arise. This will be calculated as the price the shares are sold for less the price paid plus any amounts previously subject to income tax. The capital gains tax rate will be either 18% or 28%.
Approved share schemes
The major benefit of your employer granting a share/option as an approved share scheme is that these have major tax benefits. There are two major types of approved share schemes being:
- Free Share Schemes – Share Incentive Plans (SIP)
- Share option schemes
- Save as you earn – SAYE
- Company share option plan – CSOP
- Enterprise management incentives – EMI
The main tax advantages are that:
1) On the date the options are granted to you, there will be no income tax payable
2) There is also no income tax at the date you exercise these shares
3) It is only upon the sale of the shares that you will pay capital gains tax (again at either 18% or 28%).
Each scheme operates in a different way and therefore the advantages differ in each case.
If you would like more information about the tax treatment of shares and share schemes, then please contact us on
[email protected] or call 02089520140 where tax advisors can answer your queries.
Unapproved Share Schemes
When an employer grants an employee an option, it will usually be at a value less than the current market value. This immediately gives rise to a taxable benefit and it is the difference between the market value and the price the options are granted that the employee will have to pay income tax on. This income tax charge will become chargeable on the employee at the date of acquisition (for shares) and date of exercise (for share options).
When these shares are disposed of, if sold at a profit, then a chargeable gain will arise. This will be calculated as the price the shares are sold for less the price paid plus any amounts previously subject to income tax. The capital gains tax rate will be either 18% or 28%.
Approved share schemes
The major benefit of your employer granting a share/option as an approved share scheme is that these have major tax benefits. There are two major types of approved share schemes being:
- Free Share Schemes – Share Incentive Plans (SIP)
- Share option schemes