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HMRC internal manual

National Insurance Manual

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NICs avoidance: employment income provided through third parties: securities - amount excluded under Part 7A ITEPA 2003 but treated as earnings for NICs

Certain sections of ITEPA 2003 exclude Part 7A from applying to treat amounts as employment income, see NIM53500.

The example below illustrates a situation where Part 7A of ITEPA 2003 does not apply but an amount is treated as earnings under section 4(4)(a) of the SSCBA 1992.

Example

Steps taken relating to acquisition of a security option

An employer arranges for one of its directors to be given an option to acquire 100,000 shares in the company in three years, at today’s market value of £5 per share. The director cannot exercise this option before the end of the three years.

Analysis

Subject to the facts, the steps taken to effect this transaction could be excluded under section 554N(2)(a) of ITEPA 2003, see EIM45325.

If excluded, there is no amount treated as earnings for Class 1 NICs purposes relating to the award and acquisition of the option.

Although the option is treated as earnings for NICs purposes under section 4(4)(a) of the SSCBA 1992, it is disregarded from earnings under paragraph 3 of Part 9 of Schedule 3 to the SS(C)R 2001, see NIM06824.

Steps taken relating to the exercise of the security option

In three years’ time the director exercises his option and purchases 100,000 shares for £500,000. The shares’ market value on acquisition is £1,000,000. The director has gained £500,000. The employer ensures the director can exercise his option and sell his shares through an arrangement managed by a broker.

Analysis

Subject to the facts, the steps taken to effect this transaction would be excluded under section 554N(5)(a) of ITEPA 2003, see EIM45325 and EIM45330.

If excluded, no amount is treated as earnings for Class 1 NICs purposes under regulation 22B of the SSCR 2001, see NIM52100.

The gain on exercise of the option is charged to income tax under section 476 ITEPA 2003, see ERSM110500.

It is also treated as earnings for Class 1 NICs purposes under section 4(4)(a) of the SSCBA 1992, see NIM06825.