Relevant to ATX-IRL
Share-based remuneration schemes are used by employers to reward their employees and ensure their continued commitment.
The employer pays no employers PRSI on such schemes.
An employer can simply award shares to an employee, either free of charge or at a discounted price. The value of the shares awarded in the case of free shares, (or in the case of discounted shares, the market value of the shares less any consideration paid by the employee), is treated as notional pay at the time that the shares are awarded. In other words, the tax is collected through the PAYE system in the same way as it is for other benefits in kind (BIK).
Alternatively, the employer can collect the taxes due from the employee in future payroll periods provided the liability is paid in full by 31 March of the following tax year. Otherwise another BIK charge will arise on the outstanding balance.
As well as the straight forward awarding of shares to employees, there are other options available.
Specific to the ATX exam, candidates need to be able to advise on the tax treatment of the following share option and share incentive schemes:
Let’s look at each one in turn:
Share awards mentioned above, give the holder immediate ownership of a stake in the company to an employee. Share options, on the other hand, are the promise of ownership of a stake in the company at a fixed point in the future, at a fixed price. Option holders only become shareholders when their options are exercised and have converted into shares.
In other words, it gives the employee the opportunity to buy shares at a price usually less than market value. Such share options can be can be ‘long’ or ‘short’, insofar as the option can be exercised within seven years, (short), or after seven years, (long).
The employee pays income tax, PRSI and Universal social charge (USC) at the time of exercise.
Summary of share option scheme taxation implications for employee:
Date of grant = when company grants right to acquire shares in future at price fixed today.
Date of exercise = when the employee physically acquires the shares at the (usually) discounted price.
MV = market value
Candidates also need to consider capital gains tax (CGT). Should the shares appreciate in value between the date of exercise and the date of disposal, the gain may be subject to CGT. There is an annual exemption of €1,270 per person.
Implications for the employer
Revenue approval is not required for share awards and the shares do not need to be offered to all employees.
The taxation implications of an immediate share award can be expensive particularly, if the employee is a higher rate tax payer.
Under a restricted share scheme (RSS) an employee is gifted, or acquires at a discount, a number of shares in the company or its parent, with restrictions which require that the shares must be retained for a fixed period before they can be sold. Because of the restrictions imposed on the disposal of the shares, the initial income tax, USC and PRSI liabilities are reduced.
The tax reduction depends on the length of the restriction imposed. The retention period is commonly called the ‘clog’ period
Period of retention: gain abated by (%)
During the ‘clog’ period the shares must not the sold, assigned, charged, transferred or pledged as security for loans and a written contract must be entered into to this effect.
The employer will place the shares in a trust for the benefit of the relevant employees. The longer the ‘clog’ period, the greater the reduction in taxable value.
Implications for the employee
The tax implications for the employee are the same as for basic share awards. However, the taxable value can be significantly reduced depending on the ‘clog’ period.
Again, there may be a CGT liability on any additional gain made on the disposal of the shares. The base cost of the restricted shares is the gain for income tax purposes (ie the abated amount).
Implications for the employer
The tax implications for the employer are the same as for basic share awards including that they can be offered on a selective basis.
An APSS is a Revenue approved scheme where employees and directors can convert a profit-sharing bonus into shares in their employer company. An employee may also voluntarily apply a percentage of his/her basic gross salary towards the purchase of shares. This is called ‘salary foregone’ and the amount cannot exceed 7.5% of the salary or 100% of the employer-funded bonus, whichever is lower. The shares are held in trust for a minimum of two years, but they need to be held in trust for three years to enable the employee to avoid a liability to income tax.
Implications for the employee
Implications for the employer
Revenue approved SAYE schemes involve two stages:
Stage 1
On joining the scheme an employee agrees to save a fixed monthly sum (subject to a maximum of €500 per month) out of their net pay for a pre-determined savings period of three, five or seven years. The return on savings is tax-free (ie exempt from income tax, deposit interest retention tax (DIRT), PRSI and USC). The employee is granted share options on the basis of the amount they agree to save. Options may be granted at a discount of up to 25% of the market value of the shares at the date the option is granted.
Stage 2
At the end of the savings period the employee can:
Implications for the employee
Implications for the employer
KEEP is a focussed share option programme that was introduced in Budget 2018, Unlike the share option scheme above, KEEP has restrictions on when the options can be exercised, see below.
And unlike the share option scheme above, KEEP offers a complete exemption from income tax, USC and PRSI on any gain realised on the exercise of a qualifying share option under KEEP. Instead, the gain will be subject to CGT on a subsequent disposal of the shares. This deferral of the tax until point of sale when the employee has cash resources to pay the tax liability is the main advantage of KEEP.
In other words, any gains on qualifying share options arising on the exercise of the shares will be liable to CGT at 33% rather than income tax, USC and PRSI which at the time of writing can be as high as 52%. This employee retention scheme applies to share options granted on or after 1 January 2018 and 1st of January 2024.
This incentive allows a ‘qualifying company’ within the SME sector to provide ‘qualifying individuals’ with ‘qualifying share options’, provided certain conditions are met throughout the option-holding period.
The share options must be granted to the employees at market value and the main purpose of the scheme must be to recruit or retain employees. In order to qualify for the KEEP programme, the share options must be held for a minimum of 12 months before being exercised), and must be exercised within ten years of the date of grant.
A stated above, share options granted and exercised under the KEEP do not trigger a tax liability for the employees at either the date of grant or exercise. A tax liability will only arise at the date of disposal of the relevant shares. In addition, the gain will be subject to capital gains tax instead of income tax, USC and employee PRSI.
To be regarded as a ‘qualifying individual’, the individual must be:
To be considered a ‘qualifying share option’, the option must be an option to acquire shares in the company at a price at least equal to the shares’ market value at the date of the grant of the option, be held for a minimum of one year before exercise (with certain limited exceptions applying), and only be exercisable for ten years, commencing on the date the options are granted.
The value of the shares over which share options can be granted to any one employee to be limited to:
Summary of employee (EE) share awards – click to download PDF
Paula Byrne FCCA MBA, ATX lecturer, Griffith College, Dublin