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TermExplanation
Additional Rate

For tax year 2018/19 and tax year 2019/20, the additional rate of income tax is 45%. This applies where you have taxable income over £150,000.

Remember that although UK individuals have a personal allowance for income tax purposes, once you reach income of £100,000, you lose £1 of personal allowance for each £2 you earn over £100,000. (Effectively, when you work out the sums for tax year 2018/19,  that is as if your income between £100,000 and £123,700 is taxed at 60% instead of 40%.)

The dividend additional rate is 38.1%.

The rate of capital gains tax for disposals of shares by additional rate taxpayers is 20%.

Here is a link to HMRC’s page on income tax rates and allowances: https://www.gov.uk/income-tax-rates/current-rates-and-allowances

AIM

You can read about AIM here.

Annual Dividend Allowance

This is the amount of dividends you can earn before you have to pay tax on dividends. For tax year 2018/2019 and tax year 2019/20 it is £2,000. You can find more about the taxation of dividends here https://www.gov.uk/tax-on-dividends

Articles of Association

This is the formal document that governs the relationship between a company and its shareholders. If the company is publicly traded, you probably won’t need to bother about what’s in the Articles.

However, if you are in a position where you may become a shareholder in a private company, it might be important to know what the Articles say, for instance, about how you can sell shares if you want to. Sometimes, in addition to the Articles (which are a public document that anyone can access by doing a company search), shareholders are asked to sign up to a separate shareholders’ agreement.

Award

An award is what is granted or given to you under the share plan. This might be an option, a conditional right to acquire shares or sometimes you may own shares right from the start- often subject to some type of restrictions, at least to begin with.

Base Cost

To calculate the gain which may be subject to capital gains tax you start with the proceeds of the disposal (eg the price you got when you sold your shares) and you take away the base cost.

The base cost normally depends on what you paid for the shares. But in some situations the tax rules say you must use the market value of the shares when you acquired them to calculate the base cost. There are other situations (eg spouse transfers) where a transfer doesn’t give rise to a capital gains tax event, the spouse to whom the shares are given takes over the original base cost from the transferring spouse.

The tax rules work so that you don’t normally pay both income tax and capital gains tax on the same amount. So if there’s an amount that is subject to income tax to pay when you get your shares that amount will increase their base cost.

When you acquire shares by exercising a tax-advantaged option (Sharesave or CSOP or EMI) at a time when there’s no income tax due, the base cost for those shares will normally be based on what you paid for them.

Capital gains tax calculations can be complex if you have acquired shares at different times. You may need to consider the share identification rules.

Here is a link to HMRC’s overview of capital gains tax: https://www.gov.uk/capital-gains-tax/overview

Basic Rate

For the UK tax year that started on 6 April 2018 and ends on 5 April 2019, the basic rate of tax is 20%. The basic rate for tax year 2019/20 is also 20%.

The level at which you have to pay tax on your earnings, investment income (unless covered by the new savings allowance or dividend nil rate) and any chargeable gains is £11,850 for tax year 2018/19 and £12,500 for tax year 2019/20.

The dividend basic rate is 7.5% for tax years 2018/19 and 2019/20.

Here is a link to HMRC’s page on income tax rates and allowances: https://www.gov.uk/income-tax-rates/current-rates-and-allowances

Income tax rates and rate bands can be different for Scottish taxpayers.

Capital Gain

If you sell certain types of asset, including shares, for more than you paid for them, the profit you make is called a capital gain. If you make a gain by selling shares, the gain is potentially subject to capital gains tax. In some cases if you dispose of shares by giving them away, you may be treated as if you sold them at full value and so it is possible for a capital gain to arise even if you never received any money.

If you sell shares for less than you bought them for, a capital loss arises.

In order to work out your capital gain, you need to know your ‘base cost’.

If you have lots of shares of the same kind, bought at different times, there are special share identification rules for working out which ones you are treated as selling.

The UK system for taxing capital gains is more generous than the way income is taxed. There are exemptions and reliefs that can reduce the capital gains tax that would otherwise be due.

The benefit of tax advantaged share option plans is to offer the potential for capital gains tax treatment. In some cases this means there is no tax to pay at all.

Here is a link to HMRC’s overview of capital gains tax: https://www.gov.uk/capital-gains-tax/overview

Capital Gains Tax

In the UK you only pay capital gains tax if you have made chargeable gains (for instance gains on the disposal of shares) that are more than your individual capital gains tax exempt amount for that tax year. For tax year 2018/19, this was £11,700. For tax year 2019/20 it is £12,000. This means that if you have share plan gains that are taxed as capital gains, there is no tax on them unless they are more than £12,000 (unless you also have other gains from other assets). The rate of tax on chargeable gains above the exempt  amount depends on whether, taking account of your income as well, you are a basic rate taxpayer, or a higher rate taxpayer or additional rate taxpayer for the tax year in which you sell or dispose of your shares, or other chargeable assets.

If you have previously disposed of shares whose value has fallen, you may have claimed a capital loss that you can use. This may reduce your tax bill.

For tax year 2018/19 and also 2019/20, if you have to pay capital gains tax on a disposal of shares the rate is 10% for basic rate tax payers and 20% for higher rate or additional rate taxpayers.

Here is a link to HMRC’s overview of capital gains tax: https://www.gov.uk/capital-gains-tax/overview

HMRC has produced leaflet leaflet HS287 to give you more information about capital gains tax in the context of share plans: https://www.gov.uk/government/publications/employee-share-and-security-schemes-and-capital-gains-tax-hs287-self-assessment-helpsheet/hs287-employee-share-and-security-schemes-and-capital-gains-tax-2015

If you have bought shares at different times, you will need to know about the share identification rules and HMRC leaflet HS284 is intended to help with this: https://www.gov.uk/government/publications/shares-and-capital-gains-tax-hs284-self-assessment-helpsheet

Capital Gains Tax Annual Exemption

The individual capital gains tax annual exemption for tax year 2018/19 is £11,700. For tax year 2019/20 it is £12,000.

Capital Loss

If you acquire shares and then dispose of them when they are worth less than their base cost, you will suffer a capital loss. You can make a claim to carry that capital loss forwards and use it to reduce the amount of tax you have to pay on any capital gains you make in future.

More information here: https://www.gov.uk/capital-gains-tax/losses

Cash Plan

You can read about cash plans here.

Cashless Exercise

When you exercise an option there is usually an option exercise price that you have to pay. You may have the money in your bank so you can just write a cheque. But that can mean extra admin, plus not everyone has the money handy or can borrow it. So sometimes the company offers to make arrangements for some of your shares to be sold straight away after you exercise your option. They keep enough of the money from the sale of the shares to pay the exercise price (and any employment taxes as well, usually) and you get what’s left, either as shares or as cash. That process is called a cashless exercise because you can exercise your option without having to pay any cash from your own pocket.

Clawback

If there is a clawback provision it means that you can be required to pay back all or some of the amount received through the share plan because either the performance of the business is later found to be not as good as initially reported, or because you are found to have committed some kind of misconduct which is uncovered after the award paid out.

It is quite common for share plan rules in publicly traded companies to include clawback provisions.

To make it easier for the company to operate clawback, there may be provisions that say that if clawback applies to one award, it can be satisfied by adjusting an amount that has not yet paid out under another award.

Sometimes the term clawback is used to describe adjustments before the share plan pays out- more usually referred to as malus.

Co-Investment Plan

You can read about Co-investment plans here

Company Share Option Plan

This is a type of tax advantaged share option plan. Companies must meet certain conditions in order for the plan to qualify. You can find more information here.

Conditional Share Award

You can read about conditional share awards here

Convertible Shares

Employees may acquire shares (often low value shares) that can be converted into shares of a different class (often higher value shares) in certain circumstances.

Convertible shares and the tax rules that apply to them can be quite complex and this is an area where you may well decide it would be sensible to get your own advice.

HMRC has provided lots of detailed guidance- here’s a link to where it starts: https://www.gov.uk/hmrc-internal-manuals/employment-related-securities/ersm40010

CSOP

This is the same as a Company Share Option Plan

Discount

This word is used when the price is less than market value. For instance, the exercise price of an SAYE option can be up to 20% less than the market value. You can say the exercise price is ‘discounted’ . Example: shares have a market value of £1 per share. The SAYE exercise price is set at 80 pence per share. The exercise price has been set at a discount of 20%.

EMI options may sometimes be granted with a discounted exercise price. In this case, any discount is not protected by the special EMI tax rules. The tax advantages only apply to any growth in value after the EMI option is granted.

If you are offered an opportunity to buy shares for less than the market value, the difference between the share price you have to pay and the market value is also called a discount.

Dividend

A dividend is a share of the company’s profits that the company may pay to its shareholders. Not all companies pay dividends and not all types of shares qualify for dividends.

The rules for taxing dividends changed from 6 April 2016 and a new dividend nil rate was introduced.

Dividend Nil Rate

A new rule from 6 April 2016 allows taxpayers to receive dividends up to the individual dividend allowance without paying tax on those dividends.For tax year 2018/2019 and tax year 2019/20 the dividend allowance is £2,000.

This special rule only applies to dividends, not to other types of taxable income.

Above this level, dividends are taxed according to your tax bracket. Dividend tax for tax year 2018/19 and 2019/20 is at 7.5% for basic rate taxpayers. For higher rate taxpayers the rate is 32.5%. For additional rate tax payers, the rate is 38.1%.

Dividend Shares

In the context of a tax-advantaged SIP, you may be able to get Dividend Shares. If dividends are paid by the company on the shares you hold in the SIP, the company may allow you to have them re-invested to buy more shares and hold them through the SIP.

Some other plans are structured so that if your award vests, not only do you get your award shares, but also more shares, equivalent to the dividends you would have received if you had held those shares from when your award was first granted. These are sometimes called dividend shares. Sometimes the plan provides for the dividend equivalent to be paid in cash. Either way, they will be subject to employment taxes, not taxed like actual dividends.

EMI

This is the same as Enterprise Management Incentives.

Employer National Insurance Contributions

When employee national insurance contributions are due because share plan benefits are taxed as earnings, the employer also has to pay employer national insurance contributions. Employers can find it hard to budget for this extra cash and it can even affect whether they can report a profit or not. So the Government allows an employer to ask employees to bear the employer national insurance contributions on share plan benefits as well as the employee contributions.

Many employer’s don’t- but if yours does, they need your agreement in writing. The may happen when you sign up to join the plan.

If you do end up bearing employer national insurance contributions, that amount isn’t also subject to income tax, so the calculations get adjusted. So, for instance, for tax year 2018/19, instead of paying 32% (20% income tax plus 12% employee national insurance contributions) a basic rate taxpayer’s combined rate including employer national insurance contributions works out at 43.04%. For an additional rate taxpayer the equivalent combined rate is 54.59%.

Employment Conditions

The terms of your award may include employment conditions. This means you have to remain employed within the company’s group for a defined period before your award can vest and you can get value from it.

Sometimes if you leave in ‘good leaver’ circumstances or your award vests early due to a corporate event, before the normal vesting period has been completed, you may be entitled to a proportion of the award.

Employment Taxes

Employment taxes means income tax and national insurance contributions.

Before paying you cash (such as salary or bonus or the payout from a cash plan) your employer has to deduct income tax and employee national insurance contributions. The employer has to pay to HMRC the amounts that were deducted from your cash and also has to pay them an amount of employer’s national insurance contributions.

Where what you get is not cash, but shares from a share plan award, the employer still normally has to pay income tax and national insurance contributions to HMRC. Even though
you can’t deduct tax amounts from a share, the tax system requires the employer to act as if you can. The tax system calls share payouts ‘notional payments’ and the Pay As You Earn rules apply to notional payments as well as to payments of cash.

Normally the plan rules allow the company to sell on your behalf shares worth at least enough to cover your income tax and employee national insurance that it has to pay over to HMRC for you. Sometimes you will have a choice of paying the tax amounts to your employer in cash, so that you can keep all of your shares and don’t have to sell any. But if your employer can’t recover the money in other ways, they have to reduce your take-home pay to recover what they need. Normally this is the last thing anyone wants- most people can’t pay their regular bills if their take-home pay goes down unexpectedly. So this is why most plans include provisions for selling enough shares to cover the employment taxes.

Sometimes it’s difficult to sell exactly the right amount of shares and you may find that there are small adjustments or refunds through payroll.

Enterprise Management Incentive

You can read about Enterprise Management Incentive plans here

Entrepreneur’s Relief

This can reduce your capital gains tax bill significantly if it applies. Where the conditions are satisfied, you can make a claim to reduce the rate of capital gains tax on disposals of shares in certain types of company to only 10%. There is a lifetime limit for this, gains up to £10 million. It’s less likely to apply if you work for a very big company.

The shares must be in a trading company or the holding company of a trading group. There are detailed definitions- some companies won’t qualify, even if they are trading.

Usually, to claim the relief, you must (1) have been a director or employees of a company in the same group as the share plan company, (2) holding at least 5% of the company’s ordinary share capital, (3) allowing you to exercise at least 5% of the voting rights, (4) throughout the period of at least 1 year before the disposal.

If your shares were issued on the exercise of EMI options that may be treated more generously- the 12 month period can start from the grant of the option and there’s no 5% holding requirement. For disposals of shares from 6 April 2019, you need to exercise the EMI option at least 2 years from grant in order to get the more generous treatment.

Here is a link to HMRC’s web page on entrepreneur’s relief: https://www.gov.uk/entrepreneurs-relief/eligibility

It was announced in the UK 2016 Budget that individuals who subscribe for new shares in an unlisted trading company on or after 17 March 2016 and hold them for at least three years can also claim entrepreneur’s relief. This isn’t specific to share plans, it is meant to encourage long-term investment, but it could benefit some employees too.

Exercise

In a share options context, this means taking the decision that you want your plan shares. You can only do this once all the conditions attaching to your option have been met. The terms of your option will set out what has to be done to exercise it – you may have to complete a notice of exercise, or you may be able to give an electronic instruction. You will have to pay the exercise price, unless your award is a nil-cost option.

Normally the company, or the plan administrator will contact you when you can first exercise your option and let you know what you have to do.

The period during which you can exercise your option is called the exercise period. Sometimes it’s quite short, so make sure you don’t accidentally miss it.

Exercise Period

This is the period during which you can exercise your option. If you miss the end of the period, your option will lapse and be worth nothing, you won’t be able to get your option shares.

Your option certificate should tell you what the normal exercise period is- or it may be on the information on the share plan administrator’s website.

With a Sharesave option, the tax rules say there is only quite a short exercise period of 6 months after the end of the savings contract.

With other kinds of option, the company has more flexibility on how long the exercise period can be and when it can start – although with CSOP options, tax-advantaged treatment is normally only available after 3 years from grant.

If you leave, or if there is a company event such as a takeover, the plan rules may say that a different exercise period applies. Don’t miss the deadlines accidentally! In these situations, tax -advantaged treatment may only be available if you exercise your option within certain time periods set out in the tax rules.

Exercise Price

This is the price you have to pay to exercise your option and get your option shares. The exercise price will be fixed when the option is granted.

If the option is granted under a CSOP the exercise price cannot be less than the market value of the shares at that time.

If the option is granted under a Sharesave or SAYE plan, the exercise price may be set at up to 20% less than the market value.

If the option is a nil-cost option, the exercise price will be zero- or sometimes a tiny amount.

With any kind of option that is not tax-advantaged, the company can set the exercise price to suit the particular circumstances. Employment taxes will apply when you exercise your option and get your shares. The taxes will be based on the market value of the shares, less the exercise price (if any) that you have to pay.

If the option is an EMI option and if the exercise price is less than the market value of the shares at the outset, then that difference will be subject to employment taxes when you exercise the option and get your shares.

With an SAYE option, you pay the exercise price out of the savings you made under the plan. In other cases, if you want to exercise your option, you need to have the money ready to pay the exercise price. Sometimes companies may put in place a cashless exercise, so the exercise price can be funded by selling some of the option shares.

Forfeit

If you forfeit your share awards or your shares, it means you lose them and they are worth nothing. For instance, you may forfeit your share awards if you leave. A forfeiture period is a period of time during which you may forfeit your shares or awards in certain circumstances. In these cases, people talk about shares or awards being subject to forfeiture.

Free Shares

This means an award of shares that you don’t have to pay for.

Normally, if you get shares free, there will be employment taxes on the value of the shares. This might be at the time you get them and/or at the time they stop being subject to restrictions, depending on how the free share award has been structured.

The term Free Shares also refers to an award of free shares under a tax-advantaged SIP. Special tax rules apply to this kind of free shares.

Gift Aid

Gift Aid is the UK system that enables tax-effective gifts to charity. Individuals who pay UK tax can complete a short declaration confirming they are a UK tax payer. If they do, cash donations they make are treated as if they were made after deduction of basic rate tax. The charity reclaims the basic rate tax from HMRC. This adds 25% to the value of gifts made under Gift Aid. That’s why charities are so keen for you to complete Gift Aid forms.

Higher rate or additional rate tax payers can claim higher rate or additional rate tax relief through their tax return.

This is only a tax relief, there’s no refunding of national insurance contributions.

Here’s a link to HMRC’s web page on Gift Aid: https://www.gov.uk/donating-to-charity/gift-aid

Higher Rate

For the tax year that started on 6 April 2018 and ends on 5 April 2019, the higher rate of income tax is 40%. The higher rate for tax year 2019/20 is also 40%.

The level at which you have to pay tax on your earnings, investment income (unless covered by the new savings allowance or dividend nil rate) and any chargeable gains is £11,850 for tax year and for 2019/20 is £12,500. For tax year 2019/20, the next £37,500 comprises your basic rate band. In other words the higher rate tax threshold is £50,000. Above this, going up to £150,000, is your higher rate band. For tax year 2018/19 the basic rate band was £34,500 and the higher rate tax threshold was £46,350.

Tax rates and rate bands can be different for Scottish taxpayers.

Note that once you reach a level of £100,000, your personal allowance starts to be withdrawn, at a rate of £1 for each £2 of income. So, for tax year 2018/19, above £123,700 you will not get any personal allowance. The combination of 40% higher rate tax and the withdrawal of personal allowance means that income within the bracket £100,000 to £123,700 (for tax year 2018/19) is taxed at an effective rate of 60%. For tax year 2019/20 this applies to the bracket £100,000 to £125,000.

The higher rate of capital gains tax for 2018/19 and 2019/20 is 20%.

The dividend upper rate (for taxable dividends within the higher rate band) is 32.5%.

Here is a link to HMRC’s page on income tax rates and allowances: https://www.gov.uk/income-tax-rates/current-rates-and-allowances

HMRC

This stands for Her Majesty’s Revenue and Customs, the UK’s tax authority.

Companies have to report to HMRC what is happening in relation to their share plans (and a lot of other things too!).

HMRC wants it to be easy for people to sort out their taxes- they provide lots of helpful information on the Government’s website.

Holding Period

Where shares or share awards are subject to a holding period, that means you are restricted from dealing with them during that time.

There are special rules for holding periods under a tax- advantaged SIP.

It is becoming more common for LTIP awards to involve an extra holding period once the award has vested. For example, a 3 year performance period followed by a 2 year holding period. Malus and clawback may well apply during a holding period.

Different plans deal with holding periods in different ways. Sometimes the awards vest after, say, 3 years, employment taxes are applied and you have to retain the after-tax number of shares until the end of the holding period. You may be asked to enter into a Section 431 election.

In other cases the shares may not actually be delivered until the end of the holding period, with employment taxes applied at that time.

Income Tax

You have to pay income tax on your income.

Income from your employment (for instance salary, cash bonus, share plan benefits that don’t qualify for tax-advantaged treatment) is taxed under the Pay As You Earn system.

Other types of income ( for instance interest on savings, dividends) are taxed under different rules. If your savings income is more than your personal savings allowance or if your dividend income is more than the annual dividend allowance, income tax is normally due and is your responsibility. You have to tell HMRC about it and pay the tax that is due. You may need to complete a Self Assessment Tax Return

Most people have an income tax personal allowance. For tax year 2018/19 this was £11,850 and for tax year 2019/20 it is £12,500. This means the first slice of your taxable income each tax year is free of tax. The next slice is taxed at the basic rate. The slice above that is taxed at the higher rate and if you are lucky enough to go above £150,000, the top slice is taxed at the additional rate.

Above £100,000, the tax rules say that £1 of your personal allowance is withdrawn for each £2 you earn. When you work it out, this means there is a band of your income that is effectively taxed at 60%. For tax year 2018/2019, this is income within the band £100,000 to £123,700. For tax year 2019/20 the band is £100,000 to £125,000.

Tax rates and rate bands can be different for Scottish taxpayers.

Certain payments that you make (for instance payments into your pension, payments to charity) can qualify for tax relief and reduce your taxable income.

Tax-advantaged share plans offer potential reliefs from income tax.

Income from investments that you hold through an ISA is tax free.

There are lots of detailed rules relating to income tax. Here’s a link to HMRC’s overview: https://www.gov.uk/income-tax/overview

Inheritance Tax

A tax that can apply when people die or when they make gifts.

Here’s a link to some basic information on this: https://www.gov.uk/inheritance-tax

ISA or Individual Savings Account

You can think of an ISA as a tax free bucket that the Government has introduced to encourage people to put some money aside. There are two main kinds, a cash ISA or a stocks and shares ISA. If you want to use your ISA to hold shares, it has to be a stocks and shares ISA. With most ISAs, you can take money out when you need it, without losing any tax benefits. (The Government has also introduced a new kind of special ISA to help people aged under 40 to save to buy their first house or for their retirement- these special ISAs are subject to slightly different rules).

There are various banks and other financial companies that offer ISAs. There are usually some fees charged to cover the administration involved. There will be forms to complete- you will need to contact the ISA provider for information on how to open an ISA with them. There may be limits on the kinds of shares and other investments that can be held in an ISA.

Here is HMRC’s page on ISAs: https://www.gov.uk/individual-savings-accounts/how-isas-work

Normally what you put into an ISA has to be cash. There is an exception for shares coming from tax-advantaged all-employee share plans, SAYE or SIP. No Capital Gains Tax is payable on the transfer nor on the later disposal of the shares from within the ISA. It is possible to diversify your investments by selling some of the share plan shares and buying other ones into your ISA- so that you spread the risk of the shares falling in value.

To transfer SAYE or SIP shares to an ISA you will need to check what the ISA provider needs to see to prove the shares have come from the SAYE or the SIP and the conditions are satisfied. Not all ISA providers are set up to allow transfers of shares in this way- the ISA provider has to agree to the transfer.

Here’s HMRC’s information on this: https://www.gov.uk/tax-employee-share-schemes/transferring-your-shares-to-an-isa

Long Term Incentive Plan

You can read about LTIPs here.

LTIP

This is the same as a Long term Incentive Plan.

Malus

This usually describes the downward adjustment of a bonus or a share plan payout if there is a downturn in the company’s performance or poor performance for which you are responsible or misconduct. Malus arrangements adjust share awards before the share award has vested.

It is quite common for share plan rules in publicly traded companies to include malus provisions.

Market Value

There are several situations where the tax rules need you to know the market value of the shares that are used for your share plan awards. For instance, the market value of the shares is usually the starting point when employment taxes are payable on your share plan benefits.

It’s important for capital gains tax too. For instance if you give shares away (to someone who’s not your spouse or civil partner) or choose to sell them cheap, capital gains tax may be due as if you had sold them for their full market value.

If the shares are publicly traded it’s not difficult to find out the market value, you can look it up on line. If they are listed on a recognised stock exchange the tax rules say the market value of the shares on a particular day is normally the closing mid-market price’ (the price half-way between the closing bid and offer prices) on that day. Even in other cases (e.g. AIM shares) the market value is normally based on the publicly traded price.

However, if the shares are in a private company, there won’t be a publicly traded price. The company will have to determine the market value in accordance with the tax rules. If HMRC don’t agree, they can challenge the valuation. Here is a link to HMRC’s detailed guidance: https://www.gov.uk/government/publications/hmrc-shares-and-assets-valuations-sav/hmrc-shares-and-assets-valuations-sav

To avoid this uncertainty, the company can agree with HMRC in advance what is the market value of the shares before they grant SAYE, CSOP or EMI options and they can also do this before they offer a SIP. But it’s no longer the case that the company can seek HMRC’s agreement of the valuation up front for the purposes of other types of award that are not under a tax-advantaged plan. The company normally has to operate the Pay As You Earn system in relation to your share awards based on its best estimate of the market value, but that doesn’t stop HMRC asking you for the extra if they think the company’s best estimate was too low.

If you complete a Self Assessment Tax Return and make full disclosure to HMRC, then normally HMRC has a year to raise any queries and if they don’t, it all becomes final and HMRC can’t challenge it later unless they think there has been fraud.

So if you benefited from share plan awards over shares in a private company and you are bothered that HMRC might come back to you, one approach could be to use the ‘white box’ on your tax return (the place where you can tell HMRC any extra things you think it would be helpful for them to know) to tell HMRC more about your share awards and the share value that the company used for PAYE purposes (assuming your share benefits were taxed under PAYE). If you have made full disclosure and HMRC doesn’t raise any queries then after a year you should be able to be confident that they won’t come asking for more money from you. The company might suggest what you should write on your tax return and/or this might be something you want to discuss with a professional tax adviser, especially if the amounts could be large.

Matching Shares

The way some plans work is that you are offered the opportunity to buy shares out of your own money and if you do, the company may give you some extra shares that you don’t have to pay for. These are usually called matching shares.

The most common situation is under a tax-advantaged SIP. The SIP legislation allows the company to offer employees the opportunity to buy Partnership Shares on terms that for each partnership share you buy you will get so many Matching Shares free. Conditions will apply and there are likely to be situations n which you can lose your matching shares. The partnership share agreement will say how many Matching Shares you can get and what the conditions are. The tax treatment will depend on how long the shares remain in the SIP.

Other types of share purchase plan may also offer matching shares – although not with the benefit of tax-advantaged treatment.

National Insurance Contributions

In the UK most employees have to pay employee national insurance contributions. Your employer has to deduct these from your pay. They count toward benefits such as state pension benefits.

For tax year 2019/20 the rates for most people are 12% on earnings from £166 to £962 per week (the ‘upper earnings limit’, which for most people is also the point at which they move from the basic are tax band to the higher rate tax band). Above £962 per week, the rate of employee national insurance contributions drops to 2%.

If your share plan benefits are taxed as earnings, employee national insurance contributions will be due on them as well as income tax. The exception is where, unusually, the shares are private company shares with no arrangements for you to sell them.

So, as a rough guide, a basic rate taxpayer will suffer a combined rate of 32% (20% income tax plus 12% employee national insurance contribution). A higher rate taxpayer will pay 42% (40% income tax plus 2% employee national insurance contribution). Be careful, though, remember that the share plan earnings could push you into a higher tax bracket- so if the exact tax and national insurance treatment is important to you, you need to work out the detailed numbers or get an adviser to help you do that.

When employee national insurance contributions are due because share plan benefits are taxed as earnings, the employer also has to pay employer national insurance contributions.

Here is a link to HMRC’s page showing national insurance rates: https://www.gov.uk/government/publications/rates-and-allowances-national-insurance-contributions/rates-and-allowances-national-insurance-contributions

Nil Cost Option

An option where the exercise price is nil (or a tiny amount). You choose when you want to exercise your option and there is no exercise price to pay. But employment taxes will apply based on the market value of the shares you get when you exercise your option.

Nominee

In the UK it is possible to split the legal ownership of shares from the beneficial ownership. The legal owner is registered in the company’s register of members and is the person that receives dividends and shareholder voting rights.

But it can be a lot of extra administration if lots of employees are registered individually as shareholders so often there are arrangements for a financial company to be the registered shareholder and to agree to make sure you, as the real owner, receive dividends and can get the benefits of being a shareholder.

If this happens, the financial company is called the nominee and you are called the beneficial owner. There will be a nominee agreement between you and the nominee that sets out what happens if, for instance, a dividend is paid or if you want to sell some of your shares.

In a share plans context, if there is a share plans provider that helps your company administer the share plan, it’s quite likely that they will provide a nominee service.

Even outside a share plans context, most brokers have a company to act as a nominee shareholder to ease the administration of buying and selling holdings on behalf of their clients.

Option

An option is a right to acquire something. In the context of share plans, it is a right to acquire shares, usually once specific conditions have been met. If you have to pay to get your shares, the price will be set out and you have to pay this exercise price to get your shares. Example: You are granted an option to buy 100 shares, for £1 a share, in 3 years’ time. The option plan will set out when the option can be exercised. In the example, if the share price at the end of 3 years is £3, you could buy 100 shares, worth £300, but you would only have to pay £100. At the end of the exercise period, the option will normally lapse, which means you can no longer exercise it. It’s worth making sure you know the key dates.

Option Exercise Price

This is the price that you have to pay, once the various conditions have been satisfied, in order to exercise your option and get your shares. Unless your option is a nil-cost option, there will be an exercise price to pay. Sometimes the company will offer a cashless exercise facility that makes it easier for you to fund the option exercise price.

Option Plan

A share plan that offers awards in the form of options. You can read about Option Plans here.

Partnership Shares

Where the company offers you the opportunity to buy shares under a SIP, those shares are called Partnership Shares. The money to pay for them is deducted from your pay before any employment taxed are taken off. This means that you get tax relief based on whether you pay tax at basic rate, higher rate or additional rate. However if your partnership shares come out of the plan within 5 years, there may be employment taxes to pay under the SIP rules at that point. After 5 years, there is no tax at the point when you withdraw the shares.

Pay as You Earn (or PAYE)

This is the system your employer has to use to take off income tax and National Insurance contributions before they pay your salary. Your tax code tells your employer how much to deduct. The amount deducted has to be paid to HMRC on your behalf. This way, the Government gets most of the tax it is owed without having to wait for people to fill in tax returns.

In the case of share awards that are not tax-advantaged, the employer is almost always required to account for income tax and national insurance based on their best estimate of the amount that is taxable, even though the payout is in shares not cash. To stop the employer being out of pocket, most plans allow the employer to sell shares on your behalf in order to recover the amounts of income tax and National Insurance contributions they are obliged to pay to HMRC on your behalf.

Performance Conditions

The terms of your award may include performance conditions. This means that the company must achieve some pre-determined performance levels before your award can vest and you can get value from it. Sometimes there may be individual performance conditions that you have to meet.

It is common for performance conditions to be measured over at least 3 financial years of the company. A common performance measure is earnings per share. Another one is total shareholder return, which takes account of both share price growth and dividends. If your award is subject to performance conditions, these should be set out or explained in the award documentation that you receive.

Sometimes if you leave in ‘good leaver’ circumstances or your award vests early due to a corporate event, before the performance conditions have been satisfied, the plan rules may allow the company’s remuneration committee to make a judgement about performance levels up to that point and you may be entitled to a proportion of the award.

Performance Share Plan

You can read about Performance Share Plans here.

Phantom Plan

This is a cash plan.

Private Company

You can read about Private Companies here.

PSP

This usually stands for Performance Share Plan.

Publicly Traded

A publicly traded company is a company whose ownership is at least partly dispersed among the general public in shares which can be freely traded on a stock exchange or in over the counter markets. You can buy shares in the company without having any special connection to it.

You can contrast that with a company whose shares are privately-held. This means that, in most cases, the company is owned by the company’s founders, management or a group of private investors- and sometimes employees as well. Not just anybody can become a shareholder, though.

If the company is a UK company and its shares are publicly traded, it will be a ‘plc’ or public limited company. Under company law, there are extra requirements that apply to plcs. Confusingly, not all plcs have shares that are publicly traded.

Recognised Stock Exchange

A stock exchange that is designated as a recognised stock exchange by HMRC for tax purposes. There is more information here: https://www.gov.uk/guidance/recognised-stock-exchanges

Remuneration Committee

Publicly traded companies need to have a remuneration committee made up of independent directors. This committee is responsible for sorting out the pay of executive directors and very senior employees. It also is responsible for overseeing the company’s share plans, has the final say in whether performance conditions have been met and when important decisions need to be taken in relation to the plan, it is usually the remuneration committee that has to take those decisions.

So, for instance, many plan rules say that awards subject to performance conditions do not vest until the remuneration committee has confirmed the extent to which the performance conditions have been satisfied.

Restricted Shares

Employees may acquire shares that are subject to restrictions which reduce their value, often significantly. The rules for taxing restricted shares can be quite complex.

Different types of restrictions may lead to different tax treatments.

For example the shares may be forfeited if performance targets are not met or you leave employment. Over time the restrictions may fall away so that at the end of a predetermined period the you hold shares which are unrestricted.

Or the shares may be ‘locked up’ in some way so that you cannot sell them until the end of a holding period or deferral period.

Restrictions could be imposed by the company’s articles of association. Or they could be imposed through a separate agreement with you, such as the terms of a share award or under a shareholders’ agreement.

There can be tax when you acquire restricted shares unless you pay at least their restricted value.  There is an exception that may apply where a ‘forfeiture’ restriction cannot last more than 5 years. Under this exception employment taxes  arise later, on the value when the forfeiture restrictions no longer apply. However, it is possible for you  and your employer to elect to be taxed up front.

There can also be employment taxes when restrictions are lifted or altered or you sell the shares.

Alternatively, if you acquire restricted shares you can – by agreement with the company – elect for employment taxes to be paid up front  with no further income tax charge when the restrictions are ultimately lifted.

This kind of election is often called a Section 431 election after the relevant section in the tax rules.

Restricted shares and the tax rules and valuations that apply to them can be quite complex. It can happen that tax arises under the restricted share rules even though you may not have any cash to pay it. This is an area where you may well decide it would be sensible to get your own advice.

HMRC has provided lots of detailed guidance- here’s a link to where it starts: https://www.gov.uk/hmrc-internal-manuals/employment-related-securities/ersm30300

Restricted Share Award

An award under which you acquire restricted shares at the outset.

It will be important for you to understand what the restrictions are and in what circumstances they fall away. Could you lose your shares completely in certain circumstances, or could you be asked to transfer them for less than they are really worth?

It will also be important to know how and when the award will be taxed. Will you be asked to make a section 431 election? That could involve being taxed at the beginning, knowing that if your shares  are forfeited there is no tax refund. But the hope is that your shares are not forfeited and there are no employment taxes on subsequent growth in value, so you may end up paying less tax overall.

Restricted Stock Unit

You can read about Restricted Stock Units (or Restricted Share Units) here

Rollover

If a rollover or exchange of awards is offered, you can exchange your option or award over shares in the original company for an option or award over shares in the buyer (or a company linked to the buyer).

The new award should be as nearly as possible equivalent to the old award, so with an option you would normally have the same total exercise price, although the number of shares and the exercise price per share will probably change. You would also normally have the same inherent gain or loss in the option or award immediately after the rollover as you had before.

RSU

This is a Restricted Stock Unit or Restricted Share Unit.

Same Day Share Acquisitions

If you acquire shares on the same day under different plans, a tax advantaged plan (eg Sharesave or CSOP) and one that is not tax advantaged, and you sell only some of those shares, you might play less tax at that point if the ones you are treated as selling first are those from the plan without the tax benefits.

You can elect for this treatment as an exception to the ‘same day’ share identification rule if you want to. Since amounts subject to income tax on acquisition add to the base cost, making this election would allow shares with a higher base cost to be sold in preference to shares with a lower base cost, meaning the chargeable gain is lower. But you might not care, for instance if all of the gain you make will be covered by your capital gains tax annual exemption because there would be no capital gains tax to pay anyway. And if you are going to sell all of your shares, making the election won’t make any difference to what you have to pay.

Here is link to where this is explained in HMRC’s help sheet 287. Scroll down to ‘Same day share acquisitions’. https://www.gov.uk/government/publications/employee-share-and-security-schemes-and-capital-gains-tax-hs287-self-assessment-helpsheet/hs287-employee-share-and-security-schemes-and-capital-gains-tax-2015

Savings Allowance

A new rule from 6 April 2016 gives basic rate taxpayers a personal savings allowance of £1,000. For higher rate taxpayers the personal savings allowance is £500.

More information here: https://www.gov.uk/government/publications/personal-savings-allowance-factsheet/personal-savings-allowance

SAYE

Save As You Earn or Sharesave

Scottish Taxpayers

The Scottish parliament can set different tax bands and rates of income tax on the earnings of Scottish taxpayers. For tax year  2018/19 and tax year 2019/20, both the rates and the tax bands are   different. Therefore those defined as Scottish taxpayers may pay tax on their non-savings and non-dividend income at rates that may be lower, higher or the same as the rates for the rest of the UK. In future the Scottish parliament may have wider powers to set its own tax rates and bands.

More information here: https://www.gov.scot/publications/scottish-income-tax-2019-2020/

Section 431 Election

If restricted shares have a relatively low initial value and/or people think it is worth the risk of paying tax up front (possibly on a lower amount) rather than risk having to pay more tax later based on the value when the restrictions are lifted, you and your employer may be able to jointly elect to pay employment taxes at the outset based on the market value of the shares at that time as if the restrictions didn’t apply (the ‘unrestricted market value’).

This kind of election is often called a Section 431 election after the relevant section in the tax rules.

For example, shares are awarded with restrictions. They would be worth £1000 without restrictions, but are worth only £500 with the restrictions. So the discount in value due to the restrictions is 50%. If the shares are worth £4000 when the restrictions are lifted, then if no Section 431 election has been made, employment taxes are due on £2000 (50% of the £4000).

In this example, if a Section 431 election is made, the employee and employer would jointly elect to be taxed at the outset based on the unrestricted value of £1000 but would not face any future employment taxes later due to the lifting of the restrictions.

Paying the tax up front may mean you pay less tax, but it also means you have to pay it sooner. Selling shares to fund the tax liabilities probably won’t be a choice that is available at this point, so you need to understand how the tax amounts will be funded. Unless you can reimburse your employer in some other way, the employment taxes that have to be accounted for through the Pay as You Earn system may have to be funded by reducing your take-home pay.

If you pay tax up front and later the shares are forfeited (for instance because you leave, or because performance conditions have not been achieved) there are no refunds. You could end up paying tax on something you never actually got any benefit from.

The same is true if the value of the shares falls, you could end up paying more tax at the outset than would have been the case at the point when the restrictions were lifted.

These rules for taxing restricted shares can be quite complex. Here is a link to HMRC’s pages dealing with section 431 elections: https://www.gov.uk/hmrc-internal-manuals/employment-related-securities/ersm30450

Self Assessment Tax Return

Not everyone has to complete a tax return. In many cases all the tax you have to pay will have been deducted at source (for instance when your employer deducts tax and national insurance under the Pay-As-You-Earn system).

There is guidance on HMRC’s website on who needs to complete a self assessment tax return. You can read more here.

Share

A share is a small part of the ownership of a company. The owners of shares are called “shareholders.” The value of the company is divided up amongst the shareholders.

For instance, if a company is worth £100 million, and there are 50 million shares in issue, then each share is worth £2.

As the overall value of a company changes, so does the share price. If the company’s shares are publicly traded, the price can move throughout the day.

Shares can go up and down in value for various reasons but it is not always easy to predict how and when the value will change.

Some companies can have different types of share, carrying different share rights. If your company is a private company, you should understand what the share rights are before becoming a shareholder.

Share Appreciation Right (or SAR)

A share appreciation right is an award that gives you a right to receive the value equivalent to the gain that would be made on the exercise of a share option without requiring you to fund an exercise price.

You could receive shares to the value of the option gain (if the SAR is ‘share settled’) or you may just be paid in cash.

Share Dealing Code

If a company’s shares are publicly traded, it’s important to avoid a situation where some people who are dealing in shares (and other securities) have significant information that others don’t. Directors and senior employees will often have price sensitive information that is not generally available- for instance they may know about the company’s results ahead of them being announced to the market.

There have been legal rules about this for a long time. Breaking the rules can be a criminal offence.

There will be close periods or blackout periods where certain people are not allowed to deal.

Companies have policies and share dealing codes to help ensure that directors and employees only deal when they are allowed to and that dealings are properly notified to the market as required. The company should make you aware if these provisions  apply to you.

Share awards can give rise to ‘dealing’ – it’s not limited to buying and selling shares.

In July 2016 some of the rules changed and a new Market Abuse Regulation (MAR) became part of UK law.

 

Share Identification Rules

When you work out the capital gain on a disposal of shares, you need to know the base cost of the shares you are disposing of.

If you got your shares in the company at different times, the share identification rules tell you which ones you are treated as selling. This can be complex, so specialist advice might be particularly important- but here are some pointers:

  • If you sell shares from your main holding of shares in the company, their base cost is calculated by an averaging method.
  • BUT there are several exceptions and special rules and rules have to be applied in a particular order.
  • If on the same day you acquire shares and you also dispose of shares, the shares you dispose of are matched first with the ones you acquired ( ‘same day rule’). The rule applies first.
  • Any shares acquired within 30 days after the disposal are treated as disposed of before shares from your main holding (’30 day rule’). This is intended to stop people avoiding tax by selling shares at the end of a tax year to use the CGT annual exemption and buying them back again very quickly, sometimes called ‘bed and breakfasting’. The 30 day rule applies second.
  • Only once you have applied these two rules ( if relevant) are you treated as disposing of shares from your main holding.

Here is a link to HMRC’s help sheet with some worked examples: https://www.gov.uk/government/publications/shares-and-capital-gains-tax-hs284-self-assessment-helpsheet/hs-shares-and-capital-gains-tax-2015

If you acquire shares on the same day under a tax advantaged plan (eg Sharesave or CSOP) and one that is not tax advantaged, and you sell some of those shares, you may benefit from making a special election that means you pay less tax at that point. You make the election under special rules for same day share acquisitions.

Also, if the shares you get under the plan are subject to restrictions which prevent their disposal, those shares are treated separately from your main holding. They only move into your main holding once the restrictions end. Restricted shares are subject to special tax rules.

Share Incentive Plan

You can read about Share Incentive Plans here.

Share Plan

A set of formal rules under which a company can make share awards to employees.

Share Price

This is the price you pay to buy a share.

The share price is affected by many factors —the performance of the company, by what is happening in the economy and in the business area that the company operates in, the numbers of people wanting to buy shares and the numbers of people wanting to sell them.

Share prices can go down as well as up – you will often see that warning. People need you to understand that if you buy shares, there is a risk that they will fall in value, even though that is not what everyone is hoping for. Many share plans are designed to reduce that risk- but some risk will always be there.

If the shares are publicly traded, you can look for share price information online.

If the shares are not publicly traded then you might want to ask more about the share price and how it is arrived at.

Share Purchase Plan

You can read about Share purchase plans here.

Shareholder

A person who owns shares in a company. Individual shareholders are often referred to as private investors.

Most of the shares in publicly traded companies are held by financial companies, such as banks or insurance companies, or by pension funds. These kinds of shareholders are often referred to as institutional shareholders.

Sharesave

You can read more about Sharesave (or SAYE) Plans here.

SIP

This is the same as Share Incentive Plan.

Stock

This often refers to shares in an overseas company. For instance, US companies have ‘shares of common stock’ and the people who own them are called stock holders.

US companies often refer to their plans as stock plans rather than share plans, but the principles are very similar.

Tax-Advantaged

In the UK the Government allows certain types of share plan to benefit from tax advantages. Normally this means that if the various requirements are met, the benefits of the share plan can be taxed under the capital gains tax rules, instead of income tax and national insurance contributions.

Until recently, companies had to get HMRC approval for certain types of plan, so they were called ‘approved plans’. That doesn’t happen any more. Companies now have to certify to HMRC that the specific statutory requirements for these plans have been met. Therefore the plans that have been certified as meeting the requirements are now called ‘tax-advantaged plans’.

SAYE, SIP and CSOP are all tax-advantaged plans. That means they offer potential tax advantages. Whether the tax advantages actually apply depends on whether, in the particular circumstances, all of the conditions for tax-advantaged treatment are met. Tax advantages can also apply to EMI plans.

Tax Year

In the UK the tax year for individuals runs from 6 April until 5 April in the following year.

Under Water

Sometimes you hear about options being under water. This means that the share price that you would have to pay to buy the shares in the market is less than the option exercise price.

This doesn’t happen with conditional share awards or nil cost options where, once the conditions have been satisfied, you get the whole value of the number of shares that have vested.

Vesting

Vesting usually means the point at which an option or award becomes exercisable or the shares become deliverable without any other conditions having to be satisfied (because all the employment conditions and performance conditions have been met). The period over which the conditions have to be satisfied is called the vesting period.

If the award is an option, the fact that it has vested doesn’t necessarily mean that it has actually been exercised.