Tax on Employment-Related Shares and Securities

Introduction

If you receive shares or share options through your employment, you may face Income Tax and National Insurance charges at the time you acquire them, when they increase in value, or when certain conditions are lifted. Understanding when these tax charges arise—and how to report them correctly on your Self Assessment tax return—is essential for company directors and employees with share-based remuneration.

What are employment-related securities?

Employment-related securities are shares or other securities (like share options) you receive because of your job. This includes:

• Free or discounted shares given by your employer
• Share options that give you the right to buy shares at a set price
• Shares subject to restrictions (for example, you cannot sell them for a certain period)
• Shares transferred to you as part of your remuneration package

The tax rules apply when there's a connection between the shares and your employment, even if you pay something towards them.

When tax charges arise

Tax on employment-related securities can be triggered at several points:

At acquisition

You may face an Income Tax charge when you first acquire shares if you pay less than their market value. The difference between what you pay and what the shares are worth counts as employment income.

When restrictions lift

If your shares are subject to restrictions (known as "restricted securities"), you may face a tax charge when those restrictions are removed or relaxed. For example, if you initially cannot sell shares for three years, you might be taxed when that restriction ends and the shares increase in value.

On certain events

Some circumstances trigger tax charges on the increase in value of your shares since you acquired them. These include when shares that were not readily convertible to cash (meaning you could not easily sell them) become readily convertible, or when other specific conditions in the tax legislation are met.

When you exercise share options

If you hold share options (the right to buy shares at a fixed price), you may face tax when you exercise those options—that is, when you use your right to buy the shares. The taxable amount is usually the difference between what you pay and the market value of the shares at that time.

Tax-advantaged share schemes

Some share schemes have special tax treatment and are not subject to the usual charges. These include:

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

If your shares are held within one of these approved schemes and you follow the scheme rules, you may pay little or no Income Tax and National Insurance when you acquire the shares. However, you will still need to consider Capital Gains Tax when you eventually sell them.

National Insurance contributions

Employment-related securities can trigger both Income Tax and National Insurance contributions. If you are an employee, your employer will usually deduct Class 1 National Insurance through PAYE when a taxable event occurs.

If you are a director with significant control over when securities are awarded or when conditions are lifted, special rules may apply to prevent National Insurance avoidance.

How the tax is collected

The way you pay tax depends on the type of shares and your circumstances:

Through PAYE

Your employer will often collect the tax through payroll by adjusting your tax code or making a deduction from your salary. This is the most common method for readily marketable shares where the tax can easily be calculated and collected.

Through Self Assessment

If the tax cannot be collected through PAYE—for example, because the shares are not readily convertible to cash or the charge arises after you have left employment—you will need to report the income on your Self Assessment tax return. This should be included in the "employment" section of your return.

Reporting on your tax return

If you need to complete a Self Assessment tax return, you must report employment-related securities income even if tax has already been collected through PAYE. This ensures HMRC has a complete record.

The income should normally appear on form P11D or your P60 if it has gone through payroll. Check these carefully and include the amounts in the relevant boxes on your tax return.

For less common circumstances—such as shares acquired at an undervalue, restricted securities elections, or securities disposed of for more than market value—you may need to complete additional sections or refer to specialist guidance. Helpsheet HS305 from HMRC covers these more complex situations.

Keeping records

Keep detailed records of:

• The date you acquired the shares and what you paid
• The market value at the time of acquisition
• Details of any restrictions and when they were lifted
• Dates when options were granted and exercised
• Any elections you made (for example, to be taxed on the unrestricted value of restricted shares at the outset)
• Documentation from your employer about the share scheme

You will need these records both for reporting employment income and for calculating Capital Gains Tax when you eventually sell the shares.

Capital Gains Tax when you sell

Employment-related shares may trigger Income Tax charges when you acquire them, but when you sell them you may also need to pay Capital Gains Tax on any increase in value since acquisition.

The base cost for your Capital Gains Tax calculation is normally the amount you paid for the shares plus any amount that was charged to Income Tax. This prevents you from being taxed twice on the same gain.

Getting it right

The tax rules around employment-related securities are complex, particularly when restrictions apply or when shares are not readily marketable. If you receive shares or share options through your employment, ask your employer whether the scheme is tax-advantaged and what reporting obligations you have.

If you are unsure whether you need to report anything on your Self Assessment return, or if you have received forms from your employer relating to share schemes, professional advice can help you avoid unexpected tax charges or penalties for incorrect reporting.

Sources

• Employee shares and securities: further guidance (HS305)

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.