My employer has offered me share options – What do I need to know?

11 July 2024

People

Firstly, we must distinguish between whether your employer is offering you shares or share options.

You’re being offered shares

If you’re being offered shares, this means you will have legal ownership of the shares straight away and be entitled to the rights those shares carry (voting rights, dividends…) from the off.

How will you be taxed?

If you’re being given these for free, or paying below market value, you’ll be taxed to income tax on the difference between the market value and the price you pay.

Now if these shares are ‘readily convertible assets’ (broadly they’re quoted on the stock exchange, a business sale has been agreed or there is a history of shares being awarded to employees), then your employer will likely process this through the payroll.

In this instance, PAYE and National Insurance is due.

This could leave you in a negative pay position- you have to reimburse your employer for the tax on the share award.

In practice, your employer will usually sell shares on your behalf at the time of the share award in order to cover the income tax and NI due.

When would you need to complete a tax return?

If the shares are not readily convertible assets, then you will be responsible for reporting the share award.

Your employer won’t put it through the payroll, so you will need to complete a Tax Return and pay the applicable income tax over to HMRC.

National Insurance is not due on the share value in this instance.

You’re being offered share options

This extra little word makes all the difference.

With a share option, your employer is saying to you “I’m not going to give you shares now, but I’m going to let you purchase some in X years’ time at £Y”.

A purchase price will be set at the time you’re given the options, and your employer can set various conditions to be achieved before you’re allowed to purchase them – for example remaining in employment for a certain number of years.

Enterprise Management Incentive (EMI)

EMI shares are one of the most common types of share options to be offered to employees of small or medium companies.

There will be no income tax or NICs due at the date you are granted the options.

As long as the options aren’t granted below market value, then there will be no income tax or NICs if you choose to exercise them either.

For example

Say you’re offered options over 100 shares.

At the date you’re given the options the market value is £50 per share, and this is the agreed exercise price.

In three years’ time, the shares are now worth £100 each.

You decide to exercise your options and pay a total of £5,000 (£50 x 100) to acquire them.

You’ve benefitted by receiving shares worth £100 each for only half of the cost.

As long as it’s been at least 2 years since you were granted the options, you can secure Business Asset Disposal Relief and pay just 10% capital gains tax (CGT) when you sell them.

In our example above, CGT of £500 would be due ((£10,000 – £5,000) x 10%) or £200 if you have not used your CGT annual exemption in the year of sale.

Other Types of Share Awards

There are many other share option schemes available that your company may offer you options under; Company Share Option Plans (CSOPs), Share Incentive Plans (SIPs), Save as You Earn (SAYE), Growth shares or just a plain ‘non-taxed advantaged scheme’.

Each has its own rules and tax treatments, so it’s important that you get advice if you’re thinking of joining or exercising under a company scheme.

Getting in touch

If you have been offered or are considering taking shares in your company and would like to assess your options and the tax implications then please contact Christie Inns or call us on 01634 731390.