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HMRC internal manual

Employment Related Securities Manual


Option roll-overs: transitional provisions on introduction of PAYE & NICs

Prior to 6 April 1999, a NICs liability arose on the grant of an option rather than on the actual gain from the exercise of an option. There are therefore some transitional provisions relating to options granted before 6 April 1999 which are rolled over after that date.

Equally PAYE on share option exercise only arises in respect of options granted after 26November 1996. The following is a summary of the transitional provisions.

A share option is a right to acquire shares. Both the PAYE regulations and the NICs regulations apply on the exercise of options, but only if the rights were acquired on or after the relevant dates. A full Chronology of the NICs legislation is set out in ERSM170710.

PAYE applies to the gain on exercise of share options where the rights were acquired on or after 27 November 1996. NICs applies to the gain on exercise of share options where the rights were acquired on or after 6 April 1999. It may therefore be important to be able to establish the date on which the rights were acquired.

When a share option is granted the right to acquire shares will be acquired on the date of grant of the option. Events during the life of the option may mean that the option is given up in exchange for another option. When this happens the replacement option may be equivalent to the old option but, although it is equivalent, the grant of the replacement option is the acquisition of a new right to acquire shares.


Employee is granted option over 100 shares in Company A. Company A is taken over by B and the option is replaced by an option over 200 shares in Company B. At the time of take-over Company B’s shares are worth half as much as Company A’s shares. The option is equivalent but the replacement option represents a new right to acquire shares and the date on which the right was acquired is the date of the roll-over.

PAYE position

Because of this, if an option were granted before 27 November 1996, but rolled over after that date, then on the exercise of that replacement option PAYE will be due.

NI position

Options granted before 6 April 1999 that are rolled over after that date will not have aliability to NICs on the gain on exercise to the extent that the two options are equivalent. If the replacement option has a higher total market value than the old option then there will be a NICs liability when the option is exercised if the shares or the option are RCAs. There may also be a NICs liability on the event of the roll-over itself if the amount of the total discount on the new option is higher than the old option.

If you are not sure on what date rights to acquire shares were obtained you may ask ESSU (see ERSM10040) for advice once you have obtained all the relevant facts.