Company shares scheme, have I stitched myself up

moliv3r

I originally enrolled in our company share scheme when I was a basic rate tax payer and I’ve recently become a higher rate tax payer. I’ve just sold all my shares as I needed the money for buying a property and I lost a huge amount of that money to tax. Obviously a lot of these shares weren’t past the 3 year mark where you no longer pay tax.
The issue is that all these shares were purchased while I was a standard rate tax payer and I’ve paid twice as much tax than if I’d just purchased the shares myself outside of the scheme. Does this seem right? Wish I never bothered paying in the scheme as I’d only have paid 20% tax vs 40%

underground99

moliv3r said:

The issue is that all these shares were purchased while I was a standard rate tax payer and I’ve paid twice as much tax than if I’d just purchased the shares myself outside of the scheme. Does this seem right? Wish I never bothered paying in the scheme as I’d only have paid 20% tax vs 40%

If you had bought the shares outside the scheme you wouldn't have got any free matching shares or been able to buy them at a discount. Presumably that is what you are paying your 40% taxes on, having not held the shares long enough to qualify to have that 'free money' be tax free?

It doesn't seem clear why you have lost a 'huge amount of money' to tax if you didn't get any benefit from your company.

If you are just talking about the shares going up in value since you bought them, the capital gains tax for higher rate taxpayers is only 20% not 40%, and that's after taking off the £12300 annual exempt amount (presumably if you were cashing them in you could have sold some last tax year and some this tax year to get £24600 of exemptions).#

Perhaps if you explain the amounts involved and the type of scheme and what you think you are paying tax on, someone will be able to help on whether it 'seems right' or not.

NedS

underground99 said:

It doesn't seem clear why you have lost a 'huge amount of money' to tax if you didn't get any benefit from your company.

Normally when you purchase shares in such a scheme, the purchase is tax deducible, so if you are a BRT payer you save 20% and if you are a HRT payer you save 40%. If you then keep the shares for a predetermined length of time (3 or 5 years), you can sell them tax free. If you sell early, you pay the income tax at your nominal rate. So I believe the OP is saying they purchased the shares as a BRT payer saving 20% but had to pay tax at 40% when selling them. To give an example, £125 worth of shares would have cost a BRT payer £100 to purchase but they would have to pay 40% tax (£125 x 40% = £50) when selling them giving a net return of £75 (or an overall loss of £25).
Not much you can do now in those circumstances - the incentive is not to sell before the tax free period otherwise you lose the tax benefits. If you have to sell then you are going to take the tax hit at your nominal rate. Perhaps you can pay enough into a pension this tax year to get your income below the HRT threshold and claim the HRT back?

GMNN

NedS said:

underground99 said:

It doesn't seem clear why you have lost a 'huge amount of money' to tax if you didn't get any benefit from your company.

[...]

Yes, but to underground99's point, the shares you buy through this scheme are normally matched by your employer (2-for-1 matching basis for my employer, for example).
So using your example of £125 worth of shares, the cost basis is indeed £100 as a basic rate taxpayer, but you would actually receive say £375 worth of shares (3 shares for the price of 1). Even if you end up selling the shares prematurely before the tax lock-up expires and have to forego 40% tax on them, you still come out well ahead compared to your cost basis...
Therefore I don't think OP should "regret" buying these shares - as long as the employer matched his/her contribution, they will come out on top and won't have lost money. It's just that OP would have made more money had they waited until the shares became tax-free.

Of course share price fluctuations need to be taken into account......

kuratowski

Unfortunately you forfeit the matching shares, if the partnership shares are sold within 3 years.

[Deleted User]

Hi,

did you not have the option to withdraw from the scheme and take your savings?

masonic

[Deleted User] said:

Hi,

did you not have the option to withdraw from the scheme and take your savings?

That's exactly what is happening. When you pay money into the scheme it is paid out of your gross income, so you benefit from tax relief at your marginal rate. If you withdraw from the scheme, in effect, it is deferred income, so it is taxed at your current marginal rate. If your marginal rate of tax goes from basic to higher in that period, you pay a higher rate of tax on those earnings than you would if you received them in your usual pay packet.