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All the fun of the share option

A little reflection will lead any financial adviser to appreciate how

relevant National Insurance is in so many areas of core financial planning.

As I have said many times before, the IFA&#39s “product” is the solution that

he or she offers to any problem.

In such a world, more than a passing understanding of how National

Insurance works and, perhaps even more important, how it can be

legitimately minimised without damaging entitlement to benefit, will be

essential to anyone advising employers, directors or employees.

Last week, I began to describe a few relevant developments that have

occurred in the area of share option schemes. As I explained in last week&#39s

article, since April 6, 1999, National Insurance has been payable by both

the employer and employee on gains arising when share options under

unapproved schemes are exercised (or cancelled or assigned) and where the

shares or the options are readily convertible into cash.

Now, I would like to look at two Inland Revenue-approved share option

schemes under which gains arising from the exercise of options are free of

tax and National Insurance.

At present, there are two Revenue-approved share option schemes – the SAYE

Sharesave scheme, which is an all-employee scheme, and the company share

option plan, under which an employee can be granted options over shares

worth up to £30,000.

Gains which arise from the exercise of options under both these schemes

are free of tax and National Insurance.

In addition, the new enterprise management incentives introduced in this

year&#39s Finance Bill will enable small higher-risk companies to grant up to

£1.5m of options free of tax and National Insurance to retain and

recruit highly-skilled individuals.

Income tax is chargeable on gains made by employees from unapproved share

options under Section 135 Income and Corporation Taxes Act 1988. The

employer is accountable to the Revenue for the tax under PAYE where the

shares or the options are readily convertible into cash.

Companies with very volatile share prices have expressed concern that

their exposure to an unpredictable Nat-ional Insurance liability on

unapproved share options could endanger their investment strategies, damage

their future growth by deterring investors or even make them insolvent.

A number of such companies 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&#39s National

Insurance liability on unapproved share option gains would be paid by the


As a result, it is the Government&#39s laudable intention to introduce

legislation to help companies which grant share options to their employees

as part of their remuneration packages but which experience highly volatile

share prices. I will look at the detail of this next week.


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What employers should expect over the next five years

A major feature of our articles is looking into the Jelf Employee Benefits crystal ball to predict changes and trends that may influence the short and medium term shape of UK employee benefits.  By flagging such changes early we aim to provide our followers with the tools to make sensible and informed decisions on their benefits offerings.


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