Most workers in the dark about potential tax liability on shares from employer

Most employees are in the dark about the potential tax liability they may face on shares they receive from their employer or options to buy shares, according to findings by Taxback. com.

The survey of 1,500 taxpayers was asked whether they understood the benefit-in-kind and capital gains tax rules that might apply to them if they receive shares or share options from their employer. Of those in receipt of such payments, only 14 per cent said they were familiar with the rules, with 72 per cent saying they "hadn't a clue".

And when those who had received a share-based payment from their employer were asked whether they had declared the tax they owed, three-quarters said they had not.

"Employee share schemes are a popular feature in many Irish companies, helping to reward and retain employees. But it seems most employees involved in these schemes are completely in the dark as to what these benefits mean from a tax perspective," said Marian Ryan, consumer tax manager at Taxback.com, which conducted the survey.

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“This points to an information, or perhaps a communication, gap between employers and workers around tax and tax responsibilities,” she said.

There are several different share-based remuneration schemes. In some, any tax due at the outset is deducted at source for PAYE workers. But tax after the shares have been received can be a matter for the employee.

In other cases, such as with unapproved share option schemes, the employee is liable to declare and pay income tax as well as universal social charge (USC) and PRSI on the benefit-in-kind – the gain or difference between the price they pay to exercise the option and the market price of the shares at that time – and tight reporting windows apply.

Approved profit-sharing schemes allow employers gift up to €12,700 in shares to employees each year. If retained for a set period, generally three years, no income tax applies but they are subject to PRSI and USC.

These are the responsibility of the employer to pay. However, where the shares are sold before the three-year deadline they become liable to income tax and that is a matter for the employee.

Benefit-in-kind

Similarly any dividends paid on those shares is a taxable matter, and requires completion of an annual tax return.

But share gifts in excess of the €12,700 limit will be treated as benefit in kind and subject to tax in the normal way.

Save as you earn schemes operate in much the same way. The employee agrees to save a set amount from their salary for three or more years and then has the option of buying a set number of shares in the company – potentially at a discount to their market price of up to 25 per cent.

Again, no income tax applies, but PRSI and USC on the gain they make on exercising the share options does.

Separately, under the Key Employee Engagement Programme (Keep), which allows small and medium-sized enterprises (SMEs) to use share-based remuneration for key employees, gains on exercise of share options are not liable to income tax, PRSI or USC.

In all cases any gains between the time the shares are acquired and later sold are subject to capital gains tax.