Taking a slice: the impact of tax changes on international employee share plans

Employers with internationally mobile employees who participate in employer share plans are likely to be affected by new tax and national insurance contributions (NIC) rules introduced from 6 April 2015.


If you read nothing else, read this…

  • The changes will generally affect employers with internationally mobile staff that participate in certain share plans.
  • Employers need to be aware that getting changes wrong could result in possible financial penalties.
  • The impact depends on the specific plan rules in each case.

While many employers will (understandably) not want to review the detailed changes to the legislation, it is important they are aware of the changes and what they may mean to the plans they operate.

The cost of getting it wrong is likely to be a deemed pay as you earn (PAYE) and national insurance contribution (NIC) compliance failure, with all the financial penalties this could entail.

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There is also a human capital aspect to consider. Many employees will no doubt be expecting their employers to understand the new rules and to operate PAYE and NICs correctly. Previous guidance given in an overview or a frequently-asked-questions document may need updating.

Which employers will be affected?

Generally, the changes will affect employers where internationally mobile employees participate in certain types of share plans involving share options, restricted stock units, restricted shares or convertible shares.

The impact will depend on the specific plan rules in each case and, therefore, the way in which the plan is currently taxed under the share scheme legislation.

The name of a share plan does not necessarily mean that a certain UK tax treatment will follow. A restricted stock unit under one plan can be taxed completely differently to a restricted stock unit under another plan.

Employers are recommended to seek specialist advice to confirm whether their current share plans are affected.

What are the changes?

Under the old rules, prior to 6 April 2015, share incentives were often taxed by reference to an employee’s UK residence status at the time when the share options or shares were granted or awarded.

For example, take an employee who was granted share options three years ago when they were a non-UK resident and were not expecting to come to the UK, but then moved to the UK on 1 January 2014. They became resident in the UK and exercised their share options in June 2014. Under the old rules, tax (and therefore PAYE) and NICs would not generally be required on exercise because the shares were granted when the employee was non-resident and was not expecting to come to the UK. Given this position, many UK employers simply ignored the exercise of share options by employees who were non-resident when the share options were granted.

In some circumstances, the old rules meant that employees who were granted or awarded share options when they were resident may have been still subject to PAYE and NICs in full, even where the options were exercised or shares vested when the employee was non-resident.  

Under the new rules, the UK tax (PAYE) and NIC treatment will take into account the employee’s UK residence position during the entire period from the award or grant of options or shares to the period when the options or shares vest or are exercised (that is, rather than simply looking at residence position on award). The effect of this is that while the exercise or vest of options and/or shares may have escaped UK tax and NICs under the old rules, the same options or shares are likely to now be subject to UK PAYE and NICs, on at least a part of any gain.

The new tax treatment applies to all exercises and vests which occur from 6 April 2015, even where the grant or award of the options or shares was before 6 April 2015.

What should employers do?

To address the changes, employers can determine whether the PAYE and NICs treatment of an existing share plan needs to be updated; identify any current expatriate employees who may be affected by the changes; communicate the changes with affected employees now, so it is not a surprise when, for the first time, their share options or shares are subject to UK withholding; update any internal documentation and establish a new process where required in order that PAYE and NICs may be applied correctly upon vest or exercise.

Lee Hamilton is a director at Crowe Clark Whitehill