The government said on Friday it would introduce legislation to help companies which grant share options to employees as part of their remuneration but who experience highly volatile share prices.
The change, which follows consultation announced in the March Budget, will allow employer’s National Insurance contributions to be recovered from or transferred to the employee. This is intended to solve accounting difficulties and also help smaller start-up companies with limited cash flow.
PwC tax partner John Whiting said: ‘This is undoubtedly a step in the right direction but it is not exactly a giant stride. It remains to be seen if this will be enough to answer the concerns of e-business which may still feel that it is stubbing its toes against an unhelpful tax system.’
Employer’s NIC has been viewed as a strain on emerging businesses. The problem centres on the widely used method of rewarding employees in the new economy with shares where cash is scarce. When they are cashed in, shares carry a 12.2% employer’s National Insurance charge, as well as 40% income tax. The government had previously suggested this charge could simply be passed to the employee – which would leave employees with a 52.2% rate of tax.
‘We can’t expect that the government will do other than impose income tax at 40% on the option gains – and it’s sadly clear that they are wedded to NIC as a tax that hits such gains,’ Whiting added.
‘Allowing an offset of the NIC for income tax purposes at least brings down the tax rate to 47%. But will this stop people going outside the UK to base their e-businesses – or will they simply pay their employee in shares from the outset so they can aim for the 10% Capital Gains Tax rate?’
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