PAYE operation: international employments: employees entitled to profit sharing earnings
Subjects needing special care
Profit sharing earnings normally fall into these categories.
- Locked-in shares
- Shares purchased from cash profit sharing earnings
An employee sent abroad by a UK employer to work for an associated concern may keep entitlement to profit sharing earnings. This could happen even if the overseas associated concern pays the employee for the period abroad.
The following guidance tells you how each of the three categories must be treated.
Profit sharing earnings as locked-in shares are only available to employees who are resident and ordinarily resident in the UK for the year of allocation.
When is tax chargeable?
There is no charge to tax on the amount of profit sharing earnings given as locked in shares, for the year in which the employee receives the shares. A charge arises if, before the release date, the employee instructs the scheme trustees to
- Dispose of the shares
- Transfer them into the employee’s own name
(The Share Scheme Manual gives details about the release date.)
This charge on early disposal of locked-in shares is quite separate from that imposed by ICTA88/S19. The charge is not affected by the employee being
- Not resident in the UK
- Entitled to 100 per cent relief under ICTA88/SCH12
How is tax deducted?
The scheme trustees or the employer paying the profit sharing earnings must account for PAYE if the employee obtains the value of the locked-in shares in advance of the release date. The charge is on the chargeable portion of the sale proceeds or transfer value of the beneficially owned shares.
The scheme trustees must deduct tax at basic rate if the employee is
- Not on the employer’s payroll at the time of the sale or transfer
- Temporarily abroad and paid by an overseas concern
If the employer keeps the employee on a nominal payroll whilst abroad, say for National Insurance or superannuation contributions purposes then the employer (instead of the scheme trustees) may deduct tax at basic rate.
Profit sharing earnings: shares purchased from cash
An employer may offer employees the option of buying shares outside any locked-in scheme. Purchases are made from taxed income, so no further Income Tax charge arises on the acquisition or disposal of such shares.
If any of these shares are held for convenience by the trustees of the profit sharing scheme they must be able to distinguish
- Disposals of individually acquired shares
- Disposals of locked-in shares on which a charge might arise on an early disposal
Profit sharing earnings: cash
Cash payment of profit sharing earnings is the normal alternative for employees not resident and ordinarily resident in the UK.
Such payments are subject to the normal Employment Income rules and the employer must operate PAYE on the payment at the time it is made.
If the employee leaves the employment before the cash payment is made, the employer must deduct tax at basic rate since the payment is earnings paid after the employment has ceased.
These rules apply whatever the personal circumstances of the recipient. If the former employee is not resident or is entitled to 100 per cent relief under ICTA88/SCH12, then a separate claim must be made for any refund of PAYE tax deducted by the former employer.