Class 1 NICs: employment- related securities: shares: employee shareholder status
Regulation 22(11) of the Social Security (Contributions) Regulations 2001
The Employee Shareholder employment status came into effect on 1 September 2013. This allows employees who take up this status to receive between £2000 and £50000 of capital gains tax exempt shares.
The new status of Employee Shareholder has no effect on the National Insurance position of the earner. Those who take advantage of this scheme will remain employed earners for National Insurance contribution (NICs) purposes in accordance with section 2(1) (a) Social Security Contributions and Benefits Act 1992. Equally, the employer will remain, for all purposes, the liable secondary contributor as defined in section 7 Social Security Contributions and Benefits Act 1992.
Employee Shareholders will have different employment rights to employees, and in consideration for their agreement to adopt the status they will be awarded by their employing company at least £2000 worth of shares.
As well as exempting gains of up to £50000 on Employee Shareholder shares from capital gains tax, the first £2000 of the share value that employees receive under the new Employee Shareholder status will also be free from a NICs liability (and an income tax charge).
Employee Shareholder shares will be treated as earnings for NICs purposes. On initial acquisition of the shares the amount to be treated as earnings for NICs purposes will be the same amount on which the employed earner is chargeable to income tax (under section 226A Income Tax (Earnings and Pensions) Act 2003). This will take into account the payment the employee is treated as having made in respect of the first £2000 of the share value.
Charges arising under Part 7 of Income Tax (Earnings and Pensions) Act 2003 constitute specific employment income and may arise either at the time of acquisition or, more likely, on the occasion of a post-acquisition ‘chargeable event’. In such circumstances the amount on which the employed earner is chargeable to tax will be the amount on which there is a NICs liability
- Regulation 22(7) of the Social Security (Contributions) Regulations 2001. See NIM06826
- Section 4(4)(a) of the Social Security Contributions and Benefits Act 1992. See NIM06825
Paragraph 23 of Part 10 to Schedule 3 of the Social Security (Contributions) Regulations 2001
There are a number of factors which must be satisfied before an employee takes up an Employee Shareholder status contract, including:
- The employer must provide a written statement of the details of the offer to the employee (statement of particulars) before it can be accepted.
- The Employee Shareholder status can only take effect if, following receipt of the statement of particulars of the Employee Shareholder status and the rights that attach to the Employee Shareholder shares, the employee receives advice from a relevant independent adviser as to the terms and effects of the proposed Employee Shareholder agreement.
- The prospective Employee Shareholder must be given seven calendar days to consider the offer before it could be accepted (the seven day period commences from when the independent advices is received).
- The company must meet the cost of legal advice obtained regarding the statement of particulars (whether or not the individual chooses to become an Employee Shareholder).
With regard to the provision of legal costs, or payments to the individual to reimburse legal costs, by the company - depending on the circumstances these would normally be regarded as a benefit in kind, or ‘earnings’ from employment. However, the provision/ reimbursement of legal costs will be exempt from an income tax charge and NICs liability.
Where an employer funds the costs of independent legal advice received by a person considering an Employee Shareholder offer, this will not be treated as a taxable benefit, therefore there will be no Class 1A NICs liability (section 10 Social Security Contributions and Benefits Act refers).
Where the employer makes a payment to the individual to reimburse legal costs incurred (or pays directly to the relevant independent adviser the bill the individual has received) these payments are ‘earnings’ and subject to Class 1 NICs (primary and secondary) under section 3 of the Social Security Contributions and Benefits Act 1992. However, such payments will be disregarded in the calculation of earnings for the purpose of earnings related NICs (paragraph 23 of Part 10 to Schedule 3 Social Security (Contributions) Regulations 2001 refers).