ERSM170900 – PAYE & NICs

Social Security Contributions (Share Options) Act 2001

Background

The Chancellor announced in his Pre-Budget report of 8 November 2000 a new National Insurance measure on employee share options. Legislation was introduced in summer 2000 to allow employees to agree that they will pay the employer's NIC arising on share option gains. However, some companies said that they could not make such agreements with their employees if an option had already been awarded.

The Social Security Contributions (Share Options) Act 2001 (SSC(SO)A01) received Royal Assent on 11 May 2001. This Act provided the basis for helping companies that granted share options to their employees between 6 April 1999 and 19 May 2000. Companies could limit the liability to the gain attributable to the growth in the company share price up to the 7 November 2000. The 6 April was the date on which gains on the exercise, assignment, or release of unapproved share options became liable to NIC. The 19 May was the date on which the Government announced the legislation allowing employees to agree to bear the employer's NIC.

The format of the notification was prescribed in the Social Security Contributions (Share Options) Regulations 2001 laid before Parliament on 11 May 2001. A model form of notification to pay the special contribution is shown at ERSM170920.

Where settlement was made a company was able to remove the need to make further provisions against profits for the NIC liability and can remove the provision from their accounts once the NICs is settled. The company also saved NIC in relation to any further upward movement of the share price.

The legislation also assisted companies where no NIC liability would arise on share options calculated by using the share price at 7 November 2000. This could happen where the shares were underwater, or the shares (and the option itself) were not readily convertible assets on 7 November 2000. In such circumstances no notification by the company concerned was required because a notification was deemed to have been made where the liability would be nil.

Frequently asked questions originally published on our web site can be found at ERSM170910.