Employee Share Schemes and Tax

Employee Share Schemes and Tax

Employee Share Schemes and Tax

Changes apply to the tax treatment of employee share schemes from 29 September, 2018.

The changes relate to the amount and timing of income for the employee.

What’s the big deal?

Changes to income tax legislation have introduced the concept of a share scheme taxing date.

The impact of this is that share schemes for employees will be dealt with in pretty much the same way as standard share options.

That means the employee share schemes will generally become taxable when they ‘vest’ rather than when they are sold. They become employment income.

The vesting date is usually when any loan is repaid in full and the employee has unconditional ownership of the shares. The taxable income will be based on the difference between the market price for the shares and the amount of the loan advanced, or the cash paid, when the scheme was entered into.

Any shares acquired prior to 29 September 2018 with a share scheme taxing date prior to 31 March 2022 are excluded from this new rule. Any tax considerations would apply when the shares were sold.

We discussed valuation of shares for employee share schemes in a previous blog article which you can read here.

How do you inform IRD?

The company is now required to report the taxable benefit when they file PAYE. This is not optional. The company may expose itself to assuming the liability for any shortfall in tax from the employee if they don’t report.

How is the tax paid?

There are two options.

The Employee Pays

The employee will need to pay the tax at their marginal tax rate. They must file an IR3 return with Inland Revenue.

As noted above, the benefit is treated as employment income and so will impact child support, student loans and Working for Families.

The Employer Pays

An employer can elect to treat the benefits received from the share purchase agreement as an extra pay. The obligation to pay tax is then transferred from the employee to the employer.

The employee would no longer have to file an IR3 return.

Once an employer has decided to elect to pay the tax, this is not subsequently able to be revoked. As such, if an employer uses this method for one employee, and the scheme has multiple employees involved, everyone would be subject to this method.

Another of our blog articles has a more general discussion on employee share schemes which you can read here.

The article is general in its application and is should not be seen as a substitute for specific tax advice. Employee Share Schemes are complex and both legal and accounting advice is required. 

Angus is the CEO and founder of Generate Accounting.