The tax on share options is unfair

21 November 2017

This may not be something which resonates with the general public. You may think this is something which only affects the well-paid employee. So what as far as the ordinary woman or man is concerned! Well today many ordinary workers get share options. They are not the preserve of the senior board executive. Marketing managers, HR professionals, coders, designers and many others are all likely to be workers who get them. Therefore it is important to the “squeezed middle” that their taxation is fair. But it’s not in two respects. 

Firstly an option is a long-term reward incentive. Its value builds up over several years between when the employee is awarded the option and when she exercises it. This could be 4 years, 5 years, 10 years or an even longer period. And yet all that gain is taxed at once in one tax year when the option is exercised. And this is likely to push the tax rate of that ordinary employee from 20% or 40% right up to 47% or 62% if it pushes them into that band between £100,000 and £123,000 of annual income where personal allowance are reduced by £1 for every £2 that annual income exceeds £100,000. 

This could easily be fixed if the tax rules were change so that the option gain which arises on an option exercise was spread over the life of the option between its grant and its exercise and not taxed as a single bullet-point charge on exercise. 

The second issue concerns employees with options over shares in unquoted companies. When an employee exercises their unapproved options over shares, they have to pay the income tax (and possibly NIC) due on this exercise, broadly speaking, when the option is exercised. If their employer is an unquoted company though, it will be very difficult if not impossible for the employee to be able to sell their shares to realise their value as the company’s not listed and so there is no ready market for them. Nonetheless, despite there being no way of realising cash from their shares, there’s still an income tax bill for the employee to pay. For a wealthy individual this might just about be tolerable. For a younger worker with student loans, a mortgage/rent and family responsibilities this will be much harder. This aspect of the tax regime reinforces the UK’s business culture which doesn’t encourage unquoted companies to stick around for the long-term. Changing this would be a step towards encouraging fast-growth companies to stick around for long-term independence, organic growth and the establishment of large scale companies like Amazon Apple and Google. 
This issue can simply be alleviated by changing the tax rules so that the income tax due on the exercise of options over shares in unquoted companies is only payable when that company is sold or listed when the employee will be able to realise the funds to pay their tax bill. 

We will see if the Chancellor does anything about this in his Budget on the 22 November. I wouldn’t hold your breath. 

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