Long-term incentive plans—income tax and NICs treatment
Produced in partnership with Jeremy Edwards of Baker McKenzie
Long-term incentive plans—income tax and NICs treatment

The following Share Incentives practice note Produced in partnership with Jeremy Edwards of Baker McKenzie provides comprehensive and up to date legal information covering:

  • Long-term incentive plans—income tax and NICs treatment
  • Types of LTIP awards
  • Conditional share awards (or RSUs)
  • When is a conditional share award not a securities option?
  • Tax treatment where the conditional share award is not a securities option
  • Tax treatment where the conditional share award is a securities option
  • Practical impact of classification
  • Nil-cost options
  • Forfeitable shares (or restricted stock)
  • Risk of forfeiture lasts less than five years
  • More...

Types of LTIP awards

The most common type of awards that can be made under a long-term incentive plan (LTIP) include:

  1. conditional share awards (which are sometimes known as restricted stock units (RSUs))

  2. nil-cost options

  3. forfeitable shares, which are sometimes described as restricted stock, and

  4. Share appreciation rights (SARs)

The standard LTIP now contains both a vesting period of typically three years and a further retention period of two years and this Practice Note addresses the tax implications for LTIP awards with holding periods.

For more information on each type of award, see Practice Note: Structure of a long-term incentive plan—Types of awards.

This Practice Note seeks to examine the tax treatment of:

  1. conditional share awards (RSUs)

  2. nil-cost options

  3. forfeitable shares, and

  4. SARs

It also examines:

  1. restricted share issues

  2. dividend and dividend equivalents

  3. NICs and PAYE obligations

  4. death of the employee

  5. reporting obligations

  6. other tax consequences, and

  7. impact of non-UK residence

Conditional share awards (or RSUs)

How a conditional share award (or RSU) is taxed will depend upon whether or not it is a ‘securities option’ for the purposes of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).

In practice, for most employees resident in the UK, there will be no difference in the effective tax treatment of the conditional share award regardless of whether or not the award is a securities option. However, the distinction is still relevant for

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