Frequently Asked Questions – Agreements

Contents

Q. What kind of payments can Agreements cover?

A. The following list identifies which kind of payments are suitable for employers to ask their employees to pay the employers NICs:

  • Options over securities (this includes qualifying share options for the purposes of Enterprise Management Incentives in case of a disqualifying event occurring).
  • The early exercise of options over shares granted under a CSOP.
  • All cash cancellation payments made to give up the security option or restricted and convertible securities.
  • Conditional awards (Long Term Incentive Plans - LTIPs).
  • Post-acquisition chargeable events applying to awards of restricted securities, and
  • Post-acquisition chargeable events applying to awards in convertible securities.

Q. What Employers NICs can be recovered from the employee under an Agreement?

A. The Agreement may cover some or all of the employer's NICs that may arise on securities options and restricted and convertible securities. For example, an Agreement may be for the employee to pay 50%, 75% or even 100% of the employer's NICs liability, or any employer's liability above a certain monetary amount.

Q. What format should the Agreement take?

A. This is for the employer to agree with the employee. No HMRC involvement is necessary. But we would expect any Agreement to show that it was being voluntarily entered into by the employee and not compulsory.

Q. How should the NICs be recovered from the employee?

A. It is for the employer and the employee to agree how the employee will reimburse the employer. Many employees sell some of their shares when they exercise share options in order to meet their income tax liabilities. One way of recovering the employer's NICs from the employee may be to extend this arrangement to cover the employers NIC that is transferred to the employee.

Q. How does an employee receive the income tax relief when they pay their employer (secondary) NIC liability under an Agreement?

A. The Finance Act 2000 introduced income tax relief for the employee on the amount of the secondary NICs that he pays on the share option gain, provided that it is paid within 60 days of the end of the tax year in which the gain occurred.

The Finance Act 2004 (Schedule 16 – effective from 1 September 2004) extended this relief to the amount of secondary NICs that an employee pays on a post-acquisition chargeable event applying to an award of restricted or convertible securities.

When the gain is made, or chargeable event occurs, income tax will be collected through PAYE in the usual manner. Employers will be able to operate PAYE on the amount of the taxable gain reduced by the amount of employers NIC being transferred to the employee.

Example

Employee exercises an unapproved share option on 6/05/04 and makes a gain of £1,000. She has agreed with her employer that she will pay all of the employer's liability for secondary NICs.
Employee earns above the employee's upper earnings limit.
Employees 1% NIC Charge above Upper Earnings Limit = £10
Employer's NICs is 12.8% of £1,000 = £128.
Employee pays the employer £128 on 10/05/04.
Income tax is collected through PAYE.
Amount on which PAYE will be operated is £1,000 - £128 = £872.

Q. What happens if the employee does not reimburse the employer within 60 days of the end of the tax year in which the gain arose?

A. Employees are not entitled to income tax relief on the amount of the secondary NICs if they have not paid it within the time limit. This is 60 days from the end of the tax year in which the gain occurred, the 5 June.

If they have not met the deadline and PAYE has been operated on the taxable gain net of the secondary NICs amount, then the employee will be required to repay the income tax relief to the HMRC.

This will be done via their Self-Assessment Return?