EMI Share Schemes: income tax and NI contributions
Introduction
This article explains the income tax and National Insurance contributions (NICs) treatment of EMI options. We have a number of other related articles. You should read the introduction article first.
This article explains charges that may arise when:
The option price is less than market value of the shares when they are granted;
The shares under option are free, or;
There is a disqualifying event.
Tax advantages for EMI options
At the grant of the option, no income tax or National Insurance contributions are due.
At the exercise of an EMI option (if exercised within 10 years, there having been no disqualifying event), there will be no income tax or National Insurance contributions due, provided that the employee buys the shares at a price at least equal to the market value they had on the day the option was granted.
If the option is a replacement option, it must be exercised it within ten years of grant of the original option.
Shares bought at less than market value / discounted options
If the employee buys the share at less than their market value, there will be an income tax charge when the option is exercised. There will also be National Insurance contributions where the shares are readily convertible assets.
The taxable amount is the lower of:
The amount of the discount, or;
The difference between the market value of the shares at the date of exercise and the amount paid for them.
Free options
If the shares are free, income tax is still payable on the market value of the shares at the time the option was granted, or if lower, the market value of the shares at the time the option is exercised.
Exercising an option after ten years
Simply, if an employee exercises the option after ten years, there will be no tax relief when the option is exercised.
PAYE and National Insurance contributions
If there is an income tax charge upon exercise of the option, and shares acquired under the option are ‘readily convertible assets’, thus the employer must operate PAYE and account for National Insurance.
‘Readily convertible assets’ are shares that can be sold on a recognised stock exchange. An employee will have to pay NICs when he exercises an EMI option if the shares are readily convertible assets and there is an income tax charge on the shares.
Disqualifying events
A number of changes or developments can disqualify an option from EMI relief. These are called disqualifying events. A disqualifying event restricts tax relief. Here are some disqualifying events:
Loss of independence;
The company no longer meets the trading activities requirement;
The employee is no longer eligible;
Changes to the terms of the option;
Alteration to the share capital of the company;
A conversion of shares, or;
Grant of a CSOP option that takes the option holder over the £100,000 limit.
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