This leaflet explains what might happen to your entitlement to:
if you buy shares offered by your employer through a Share Incentive Plan.
Contents
What is a Share Incentive Plan?
Some employers offer their employees the opportunity to buy, from their gross pay, partnership shares in the business under a Share Incentive Plan. If this applies to you, your employer will give you details of the plan, which will normally include a warning that you could lose some entitlement to state benefits and tax credits if you take part.
This leaflet answers many of the questions you might have and explains why you should consider carefully the possible effects on your benefit and tax credit entitlement before you decide to buy partnership shares. It is not intended to give you advice on whether or not you should take part in a Share Incentive Plan. The information in this leaflet is based on the rules that apply at the time of writing.
This leaflet explains how buying shares might affect your benefit entitlement and describes the effect on:
How will buying shares affect my benefit entitlement?
Under the Share Incentive Plan rules, you will not pay income tax or NICs on the pay you use to buy shares. Although this means you get more shares for your money, it also:
As your entitlement to some benefits is based on the amount of NICs that you pay, and others on the amount of your earnings, buying shares may affect your current or future claims for a range of benefits.
For most employees, paying less in NICs will not matter because:
Buying shares through a Share Incentive Plan may also affect your entitlement to Statutory Sick Pay, Statutory Maternity Pay, the State Pension and any means-tested benefits or tax credits. You should consider these effects before you decide whether to buy shares. It may also affect entitlement to contribution-based benefits such as Employment and Support Allowance.
How does buying shares affect contribution-based benefits?
Your entitlement to contribution-based benefits is related to the amount of NICs that you have paid, or are treated as having paid or are credited. Buying shares may reduce the amount of earnings on which you pay tax and NICs to below the LEL, so that you are no longer paying (or deemed to be paying) NICs on your income. Even if your income remains above the LEL, because you are paying (or deemed to be paying) less in NICs, this may reduce your entitlement to contribution-based benefits.
Contribution-based benefits include
How does buying shares affect earnings-related benefits?
Your entitlement to earnings-related benefits is based on the level of your earnings, not including any amounts you use to buy shares. If buying partnership shares brings your deductible earnings below the LEL, this will reduce your entitlement to these benefits.
Earnings-related benefits include
How will buying shares affect work-related payments?
Work-related payments are paid by your employer and are based on your average earnings over a fixed period before you begin to receive them. Any amount of pay you use to buy shares is not included as part of your average earnings for calculating these payments, so they may be reduced if you buy shares from your gross pay.
Work-related payments include
How will buying shares affect my tax credit entitlement?
The tax credits that can be affected are:
The amount of a WTC or CTC award depends on a number of factors, including the number of hours you work, how many children you have, whether you pay eligible childcare costs and the annual gross income (before the deduction of income tax and NICs) of you and your spouse or partner. Broadly, you will have to report in the tax credits claim form income of a tax year – usually the last complete tax year before the year of the tax credits claim – which is taken into account for income tax purposes.
For tax credit purposes, if you make contributions from your earnings to buy shares in your employer’s company under a Share Incentive Plan, those contributions must be added back to your gross pay. Also, gains from securities (such as company shares, bonds etc) and securities options acquired in connection with your employment and which are charged to income tax as “employment income”, must be reported as such in your tax credit claim form.
How will buying shares affect my means-tested benefits?
The amount of capital you own, and the amount of your net income, affects
your entitlement to means-tested benefits.
If you or your partner is receiving one of these benefits when you buy
shares through the plan, because your net income (including the value
of the shares you buy) rises, you may receive less benefit.
The market value of shares, however you buy them, is treated as capital,
owning shares can reduce your entitlement to means-tested benefits if
the share value takes your capital above the lower limit.
Means-tested benefits include
How does buying shares affect married women paying reduced-rate National Insurance contributions?
If buying shares reduces your earnings to below the LEL, you will not be liable to pay NICs and will not be treated as having paid them for benefit purposes.
If you are a married woman and your earnings are below the LEL for two consecutive tax years, and you are not self-employed in those years, you will automatically lose the right to pay reduced-rate NICs.
Can I put money from my pay aside to buy shares later?
Only if your employer offers you this option. If so, you can accumulate money this way for up to 12 months before it is used to buy shares. Tax and NICs are not deducted from this money.
Can I ask for a refund of this money?
Yes. However, when you receive the refund, because the money is no longer being used to buy shares, tax and NICs will be deducted from it. These deductions could restore in part or in whole the benefit entitlement that you may have lost. The tax and NICs you pay on the refund may also offset the additional net pay that you had received as a result of buying shares.
You might find the following useful:
HM Revenue & Customs (HMRC) produces a wide range of leaflets, booklets and help sheets, each designed to explain different aspects of your tax or National Insurance in plain English, and to assist with the completion of tax returns. Most of them are free, and most are also available in Welsh. Our ranges of leaflets are available on our website.
HMRC also has a full range of services for people with disabilities, including leaflets in Braille, audio and large print. For details, please ask at your local HMRC office or Enquiry Centre.
Information about our service commitment to you is available online at
Your Charter.
Information on how to complain & our appeal procedures is available
online at How to complain
to HM Revenue & Customs.
These notes are for guidance only and reflect the tax and NICs position
at the time of writing. They do not affect any right of appeal.
Issued by HM Revenue & Customs January 2011© Crown Copyright 2011
