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HMRC internal manual

Employment Income Manual

PAYE: special types of payment: shares ceasing to be only conditional or being disposed of: share incentive plans and restricted share schemes

Part 7 Chapter 2 ITEPA 2003

The Share Schemes Manual (see SSM4.1) explains the tax consequences of various share awards. It is important to distinguish between:

  • share incentive plans (see SSM4.9)
  • restricted share schemes - shares subject to forfeiture (see SSM4.10).

Part 7 ITEPA 2003 was fundamentally amended by Schedule 22 FA 2003. The various changes take effect from different dates. The Share Schemes Manual will be amended in due course to describe the effect of the new legislation. The guidance below refers to the legislation that applied before the amended legislation took effect. For details of the new legislation see EIM12200.

Share incentive plan

In a share incentive scheme an employee may be promised, or even allocated, shares but does not acquire the shares until particular conditions are met. Most long-term incentive plans come into this category.

The charge to tax arises when the conditions are satisfied and the employee acquires the shares. If the shares are readily convertible assets, PAYE must be operated when the conditions are satisfied (see example EIM11922)..htm”>EIM12200

Restricted share scheme

In a restricted share scheme an employee is provided with shares under conditions that the shares may be forfeit at a future date.

The tax charge arises when the risk of forfeiture is lifted, or when the shares are sold if they are sold before the risk of forfeiture is lifted. At the time the tax charge arises, if the shares without conditions would be regarded as readily convertible assets, the employer is obliged to operate PAYE by virtue of Section 698 ITEPA 2003 (see EIM11865).

Approved share schemes

An employer is not obliged to operate PAYE in respect of shares, or options over shares, awarded in Inland Revenue approved share schemes (see Share Schemes Manual, SSM2.1) subject to one exception. In certain circumstances an employer is required to operate PAYE in relation to the exercise of a right to acquire shares taking place on or after 9 April 2003 under approved company share option plan (CSOP) schemes (see EIM12210).