Share schemes overview

Historically, the development and use of share schemes can be linked to companies seeking to use the rules to reward employees and directors in a way that did not, typically, attract income tax and national insurance contributions (NIC). However, as with all such schemes, the legislation has developed in order to ensure that payments by way of salary or bonus could not be simply recategorised in this way and paid out with lower (or even no) tax due.

The legislation in ITEPA 2003, Part 7 sets out a wide range of scenarios where income tax and, potentially, NIC are due on transactions and events that involve shares and securities, particularly those where the recipients have an employment relationship with the company.

However, share schemes are still a popular method of incentivising employees and there are a number of specific plans which have been approved by HMRC, commonly termed ‘approved plans’ before April 2014, for companies to use. For commentary on why share schemes are popular methods of retaining staff, see the Why use a share scheme? guidance note (subscription sensitive).

FA 2014 introduced new rules relating to share schemes to simplify the administrative burden of running the schemes for companies. As a result, from 6 April 2014 share schemes, including share option schemes, no longer need to be approved by HMRC in advance of award of the shares or grant of the option. Instead, the taxpayer must provide notification within a certain time frame and self certify that a scheme meets the criteria to benefit from the beneficial tax rules. Share schemes that were previously known as ‘approved’ schemes are now referred to as ‘tax-advantaged’ schemes.

Given that tax-advantaged plans confer tax advantages on the shares or options issued, the terms and criteria for qualification have been drawn by HMRC on a narrow basis.

Where a share scheme is