The new change, which follows consultation announced in the Budget, will, following agreement between companies and their employees, allow the employer’s National Insurance contributions to be recovered from or transferred to the employee. This will solve accounting difficulties and also help smaller start-up companies with limited cash flow.

In addition, the employer’s National Insurance paid by employees as a result of this change will qualify for relief against the taxable gain on the share option.

Financial Secretary Stephen Timms said :

“I am very grateful to everyone who responded so quickly to the consultation announced in the Budget. Allowing employers and employees to come to an agreement to recover or transfer the National Insurance charge should provide a technical solution by completely eliminating the unpredictability of the charge. Many of the companies that responded to the consultation said that they will use this solution.

“I intend to continue this dialogue about how we can make Britain the best competitive environment for e-commerce. We want to attract business and jobs to Britain and help British companies compete in the global market. Giving the employee tax relief for the National Insurance they pay will help to ensure that the UK tax system remains highly attractive.”


1. The main change would remove the current statutory bar which prevents employers and employees coming to an agreement under which the employee can pay the employer’s National Insurance Contributions (“NICs”) but only in respect of share option gains. The employer and employee will be able to come to a voluntary agreement under which the employee could agree to fund all or part of the employer’s NICs. Alternatively, the employer and employee will be able to make a joint election under which the liability for all or part of the employer’s NICs is transferred to the employee. An election will take effect after the Inland Revenue have approved the form of the election and the arrangements made for securing that any liability transferred by the election is paid.

2. The change will enable employers and employees to come to an agreement or make an election in relation to any unapproved share option granted on or after 6 April 1999 where a gain has not yet arisen.

3. This change should help companies with very volatile share prices that offer their employees substantial share options as part of their remuneration package. Recovering the employer’s NICs from the employee or transferring the charge to the employee should solve the accounting difficulties faced by companies. These arise because of the need for companies to put a provision in their accounts for a NICs liability that is unpredictable since it depends on the company’s share price at the time when the employee decides to exercise his or her option. It also helps smaller start-up companies which may have limited cash flow by putting the company in funds to pay their NICs charge or by moving the payment of the NICs charge to the employee.

4. In a separate measure, a new tax relief will be introduced which will allow employees to set off any NICs they pay, under an election or under an agreement to recover NICs, in calculating the income tax charge arising on the share option gains.

5. The Government does not want employers to be able to transfer their wider National Insurance liabilities to their employees. The legislation will therefore also confirm the existing general statutory bar on doing so, and extend it to Class 1A (on benefits in kind) and Class 1B (on PAYE Settlement Agreements), both of which are only payable by employers.

6. These changes will be introduced at the first legislative opportunity.


1. Since 6 April 1999 National Insurance has been payable by both employer and employee on the gains arising when share options are exercised outside an Inland Revenue approved scheme (or are cancelled or assigned) and where the shares or the option are readily convertible into cash. Before then, National Insurance was payable when share options were granted, but only if the options were granted at a discount and any charge was limited to the amount of this discount. The rules were changed because the charge at grant reflected neither the gain that the employee made when the option was exercised nor the fact that the option might not be exercised. The old rules were also deliberately used by some firms to pay large bonuses to directors and top-paid employees free of National Insurance.

2. Whereas the employee’s earnings are subject to a cap (currently #27,820) above which no NICs are payable by the employee, the earnings cap on secondary NICs (normally borne by the employer) was removed in 1985 by the previous Administration to offset the cost of reducing the NICs burden for the lower paid. The secondary contribution rate is currently 12.2%.

3. There are currently two Inland Revenue approved share options schemes, the SAYE Sharesave scheme which is an all-employee scheme and the Company Share Option Plan (CSOP) under which an employee can be granted options over shares worth up to #30,000. Gains arising from the exercise of options under these schemes are free of tax and National Insurance. In addition, the new Enterprise Management Incentives introduced in the 2000 Finance Bill will enable small higher-risk companies to grant up to #1.5 million of options free of tax and National Insurance to retain and recruit highly-skilled individuals.

4. Income tax is chargeable on gains made be employees from unapproved share options under Section 135 Income and Corporation taxes Act 1988. The employer is accountable to the Inland Revenue for the tax under PAYE where the shares or the option are readily convertible into cash.

5. Companies with very volatile share prices have expressed concern that their exposure to unpredictable NICs liability on unapproved share options could endanger their investment strategies, damage their future growth by deterring investors or even make them insolvent. A number have suggested that their exposure to these difficulties could be resolved by allowing a voluntary agreement between employer and employee under which some or all of the employer’s NICs liability on unapproved share option gains would be paid by the employee.

6. In his Budget speech the Chancellor announced that he was asking the Financial Secretary to consult on a technical solution to this problem that would allow employer and employee to come to a voluntary agreement under which the employer’s NICs liability would be paid by the employee. Since then the Financial Secretary and officials have met with around 50 companies and representative bodies and received over 20 written representations on this issue. Many of the companies have said that they would use the opportunity to recover the NICs charge from the employee or to transfer it to the employee, if the employee agrees.

7. Many other EU countries impose social security taxes similar to NICs in the UK. They also charge social security taxes on taxable gains on the exercise of share options. The rates vary between countries depending on their tax structure. Some EU countries have higher initial social security rates that the UK. An employer’s overall bill in these other countries may be less than the UK when an employee receives high levels of remuneration, because the liability in the UK is uncapped.

8. The position in the US is similar to the UK in that social security taxes are payable by the employer on share option gains made by employees. Although the main social security tax chargeable at 7.65% is capped at earnings of $72,600, the 1.45% Medicare charge, which is also payable by both employers and employees, is uncapped.

9. The UK has one of the lowest top rates of income tax (40%) in the world. Giving an employee a deduction for the NICs charge in computing their income tax will reduce the overall headline rate of tax on share option gains from 52.2% to 47.32%. This compares favourably with the top rates of tax in many EU countries and is similar to what is paid in the US when state income taxes are taken into account as well. For example, France, Germany, the Netherlands, Spain and Sweden all have top income tax rates in excess of 47.32%. In the US an employee living in California pays a top rate of over 45% and one living in New York City would pay over 46%. The reforms to Capital Gains Tax announced in the Budget have also created a very favourable environment for employee shareholders in the UK.

10. To fully evaluate the competitiveness of the UK compared with other countries it is also necessary to compare the rates of company tax. The UK currently has the lowest starting rate of corporation tax in the EU at 10% on profits up to #10,000 and the lowest main rate (30%) of corporation tax among major industrial countries.

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