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Through NIC and thin

Over the last couple of weeks, I have looked generally at the importance

of understanding National Insurance to those giving advice to employers and

employees, including the new provisions on gains under unapproved share

option schemes.

Follows a consultation period announced in the Budget, a new change

introduced on May 19 will, following agreement between companies and their

employees, allow employers&#39 NI contributions levied when an unapproved

share option is exercised to be recovered from or transferred to the


This will solve accounting difficulties and help smaller start-up

companies with limited cash flow.

In addition, employers&#39 NI paid by employees as a result of this change

will qualify for relief against the taxable gain on the share option.

In the press release announcing the change, Treasury financial secretary

Stephen Timms said: “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 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 bus-iness 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.”

The change is important as it removes the current statutory bar which

prevents employers and employees coming to an agreement under which the

employee can pay the employer&#39s NI contributions although this is 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&#39s

NICs. Alternatively, the employer and employee will be able to make a joint

election under which liability for all or part of the employer&#39s NICs is

transferred to the employee. An election will take effect after the Inland

Revenue has approved the form of the election and the arrangements made for

securing that any liability transferred by the election is paid.

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 April 6, 1999 where a gain has not yet arisen.

This change should help companies with very volatile share prices (the

dotcoms are an obvious example) that offer their employees substantial

share options as part of their remuneration package.

Recovering the employer&#39s 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 com-panies to put a

provision in their accounts for an NIC liability that is unpredictable

since it depends on the company&#39s 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 giving the company the funds to pay its NIC charge or by moving the

payment of the NIC charge to the employee.

As a very important sweetener for employees, a new tax relief will be

introduced which will allow them to set off any NICs they pay under an

election or agreement in calculating the income tax charge arising on the

share option gains.

The Government does not want employers to be able to transfer their wider

NI liabilities to employees. The legislation will 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. It is understood that these changes will be

introduced at the first legislative opportunity.

The UK has one of the lowest top rates of income tax (40 per cent) in the

world. Giving an employee a deduction for the NIC charge in computing their

income tax will reduce the overall headline rate of tax on share option

gains from 52.2 to 47.32 per cent. Thiscompares 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 per cent. In the US, an employee

living in California pays a top rate of over 45 per cent and one living in

New York City would pay over 46 per cent.

The reforms to capital gains tax (the “new improved” taper relief

provisions) announced in the Budget have also created a very favourable

environment for employee shareholders in the UK.


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