Taxation of employee shares in the United Kingdom

Robert, an investment bank director, contacted me, a bit upset, with documents concerning shares he had received from his employer. He was convinced he would benefit from a very advantageous program called Share Incentive Plan (SIP), which would allow him to avoid high taxes upon receiving the shares. Unfortunately, as it quickly turned out, that wasn't the case at all.

Why? Let's look at it from the ground up, in a very simple way.

What is a Share Incentive Plan (SIP)?

A Share Incentive Plan is a very tax-efficient share scheme where an employer can transfer company shares to an employee with exceptionally low tax or even completely tax-free – provided thatthese shares are held for a minimum of 5 years.

Example (SIP – tax-advantageous):

Imagine Robert has an apple tree in his garden. This apple tree represents his company. If Robert is patient and doesn't cut down the tree for five years (meaning he holds the company shares), the tax office will say:

Congratulations! You can sell the apples (shares) without additional income tax, because you were patient for the required 5 years.

So, the key rule of SIP:

- You hold the shares for at least 5 years – you gain full tax relief.

- If you sell the shares sooner than 5 years, partial or full tax will apply.

What happens if Robert doesn't have a SIP, but only ordinary shares (non-tax advantaged)?

Robert was convinced he had shares from a SIP scheme, but unfortunately, he received shares under a regular, non-tax advantaged program.

In practice, it looked like this:

The employer transferred shares worth, for example, £10,000 on the market to Robert. Robert didn't pay anything for these shares, so the tax office says:

Robert, you've just received a gift worth £10,000 from the company. This is additional income, like a salary, so you must immediately pay income tax and National Insurance contributions.

The result? Robert immediately loses a large portion of these shares because the company immediately deducts income tax and National Insurance Contributions (NIC) from him:

• Income Tax (e.g., 45%): £4,500

• National Insurance Contribution (2%): £200

Total: £4,700 in tax

The result? Robert received shares nominally worth £10,000, but £4,700 in tax was immediately deducted. In practice, these shares already cost him £4,700 upfront, even though he hasn't sold anything yet. If the shares later lose value, for example, dropping to £8,000, Robert is at a loss because even though the shares are worth £8,000, he has already "paid" taxes on the £10,000 value.

How would the situation look if Robert had a SIP?

If Robert had received shares under a Share Incentive Plan (SIP), the situation would be much more favorable:

• He receives shares worth £10,000 from the company.

• He holds these shares for at least 5 years.

• After 5 years, he sells the shares, for example, for £12,000. At that point, the tax office says:

Robert, as a reward for your patience – you don't pay tax on the amount you originally received (£10,000), only potential Capital Gains Tax (CGT) on the increase in value itself (i.e., on the £2,000 profit).

In practice, the savings are enormous because he avoided income tax on the initial value of the shares, which would normally amount to the aforementioned £4,700.

What you need to know when receiving employee shares:

SIP Option (tax-advantaged)

• If you hold the shares for a minimum of 5 years, you do not pay tax on the value of the shares received.

• You will only pay a low Capital Gains Tax on any increase in their value (if applicable).

Standard plan (non-tax advantaged)

• As soon as you receive the shares, you pay high income tax and National Insurance.

• Later, if the shares lose value, you could actually incur a loss – you've already paid high tax upfront.

What should you check when receiving shares at work?

Robert learned an important lesson: not all shares are created equal. If your company offers you employee shares, make sure it's a Share Incentive Plan, or a standard (non-tax advantaged) plan.

• If it's a SIP – you can gain significantly, but you need to be patient and hold the shares for several years.

• If it's a standard share plan, be prepared to pay tax immediately (often high, as in Robert's case – 45% tax plus an additional 2% NIC), before you see any real profit.

That's why, whenever a client asks me about employee shares, I advise them to carefully check the documents from their employer to see if it's a SIP or just a regular 'gift' which could mean significant and immediate tax costs.