- There are no income or social security taxes.
Income Tax is payable up to a maximum rate of 45%, withheld by the Local Company. Scotland has the ability to set its own Income Tax rates and so Scottish based residents may be subject to an alternative rate of Income Tax.
Employee National Insurance is payable up to a maximum rate of 12%, withheld by the Local Company (capped). This rate is payable until a Participant reaches their 'upper earnings limit' for Employee National Insurance contributions.
Employee National Insurance is payable up to a maximum rate of 2%, withheld by the Local Company (uncapped). This rate is payable on all earnings above a Participant's 'upper earnings limit' for Employee National Insurance contributions.
Employer National Insurance is payable up to a maximum rate of 13.8%, payable by the Local Company (uncapped). With the prior agreement of the Participant (usually obtained at the time an Award is granted), it is permissible for the Participant to reimburse the Local Company for the Employer National Insurance contributions.
- The taxable amount is the amount by which the market value of the shares on exercise exceeds the exercise price.
Capital Gains Tax is payable on the growth in value of the shares up to a maximum rate of 20%, payable by the Participant.
Other / Notes
Tax Advantaged Arrangements
There are tax-advantaged share plan arrangements available. These include:
- EMI Options - primarily aimed at smaller, growth companies, EMI options are not generally subject to tax on grant or exercise.
- Company Share Option Plans - available to a wider number of companies, options granted under a Company Share Option Plan are not generally subject to tax on grant or exercise (provided that they are held for at least 3 years).
- Sharesave - a special arrangement that must be made available to all UK employees and through which employees are granted options for which the exercise price is paid through a monthly savings contract.
- Share Incentive Plan - a special arrangement that must be made available to all UK employees and through which employees can purchase shares from pre-tax salary and/or be awarded free shares tax-free (subject to annual limits).
In addition to providing tax advantages to the Participants, these arrangements may also reduce the amount of employer National Insurance payable by the Local Company.
Once a Participant has acquired shares in the Company, they will pay Income Tax on dividends received at a maximum rate of 39.35% (although, in limited circumstances, dividends paid by certain non-UK resident companies may be subject to higher rates of Income Tax if they are regarded as payments of interest). Each Participant also has a small, annual tax-free allowance in respect of dividends. The Income Tax is payable by the Participant and there are no withholding or reporting obligations for the Local Company. There is no liability to pay either Employer or Employee National Insurance contributions.
Corporate Tax Deduction
In relation to Awards that are settled in shares, the Local Company may be able to claim a statutory tax deduction in respect of the Awards to its employees. This tax deduction does not require the Local Company to be recharged by the Company; it is a deemed deduction based on the value of the Awards at vesting/exercise.
In relation to Awards that are settled in cash, the Local Company may be able to claim a tax deduction. In order to be able to claim this deduction, the cost will need to be recharged to the Local Company (under a written agreement).
Administration costs recharged (under a written agreement) to the Local Company may be deductible.
If the Participant is engaged as an employee through a Professional Employer Organisation (PEO) or other Employer of Record (EoR) then the above tax treatment will apply save that the PEO or EoR will be responsible for accounting to HM Revenue & Customs for the withheld taxes and the employer National Insurance contributions. The terms of the engagement between the Company and the PEO or EoR should provide for how these taxes and National Insurance contributions will be accounted for. Tax withholding and National Insurance contributions will arise even if the shares of the Company are not listed on a stock exchange (and the special treatment mentioned below for "unlisted shares" will not be available).
If the Participant is engaged as a consultant then all taxes arising in connection with the Award should ordinarily be for the account of the Participant and there should be no withholding obligation. The Participant should be encouraged to seek independent advice, particularly as the Award may be subject to income tax on receipt. Employer National Insurance contributions and the Apprenticeship Levy should not ordinarily be payable. Before adopting this tax treatment, however, the Company should carefully consider the correct status of the Participant: it is a question of fact whether the Participant is engaged as an employee or a consultant and HM Revenue & Customs will seek unpaid taxes if the Company gets this wrong.
The special tax advantaged arrangements (see above) are not generally available either to consultants or to employees engaged via a PEO or EoR. The statutory corporate tax deduction (see above) will also not be available and further advice should be sought on whether a tax deduction might be available under general principles.
If the shares of the Company are not listed on a stock exchange and if the shares are not 'readily convertible assets' at the applicable time:
- there may be no withholding obligation for the Local Company (with the Income Tax being payable instead by the Participant under their self-assessment tax return); and
- there may be no Employer or Employee National Insurance contributions to pay.
If the amount of salary and benefits paid by the Local Company in the UK (Pay Bill) exceeds £3 million (GBP) (c. EUR €3,300,000) in a tax year, then there will also be a levy on the Local Company of 0.5% of the Pay Bill, known as the Apprenticeship Levy.