On 21 April 2001 an employee is granted an option over 2000 shares at £1 per share.

The company is a private company not listed on any exchange. The option can be exercised between 1 January 2003 and 31 December 2007.

On 20 June 2003 the share value reaches £5, the employee exercises the option and acquires shares worth £10,000. The shares can not be sold immediately but each year on 30 June the employer organises a share sale, at which the company repurchases at market value any shares that the employees wish to sell. Therefore, when the employee acquires the shares on 20 June 2003 he knows that it is likely the employer will buy them back at market value. This constitutes an understanding that trading arrangements are likely to come into existence.

The amount on which a Class 1 NICs liability arises is the same amount which is chargeable to tax as employment income, i.e. £8,000 (£10,000 less £2,000).