Employee Share Incentive Plan... Feeling ripped off, is this Right??

jacko74

I'm feeling distinctly ripped off after taking part in an employee share purchase scheme, hopefully someone can confirm if the situation is correct.
I'll try and keep this as concise as possible with bullet points-

- I contributed £23 a week of my pre-tax pay for 18 months to purchase the shares, so approximately £1,800 in earnings that I ''avoided'' paying 20 percent tax on, so about £500

- I've since left the employer and didn't hold the shares for the required 3 year period which would have negated the tax liability on them 

- I assumed my tax and NI liability would be the £500 that I ''avoided'' paying when purchasing the shares from my pre-tax earnings

- But apparently my tax and NI liability is 20 percent of the value of the shares when I left the company, that value being £8,100, the liability on which they've calculated     at £2,100!!

Just for clarification this liability is purely based on income tax, CGT doesn't come in to the equation.

Does all this sound right?

moneysavinghero

Even after paying for the tax liability you will have made £4,200 more than what you spent. Seems like a nice problem to have to me. (133% return in 18 months - wish i could get that)

It is correct that you pay income tax and NIC based on the share value at time of sale.

kuratowski

It's correct.

Income tax payable on the market value of the shares when they are withdrawn from the plan (Section 506(2) ITEPA 2003)

The table has not been formatted properly, but this is the entry for the row "Partnership shares" and the column "If shares withdrawn from plan during first 3 years" from https://www.gov.uk/hmrc-internal-manuals/employee-tax-advantaged-share-scheme-user-manual/etassum29020

moneysavinghero

Apparently 

A participant will not be liable to income tax on shares ceasing to be subject to the Schedule 2 SIP if they cease as a result of the participant ceasing to be in relevant employment due to the following (‘good leaver’ provisions):

1. because of injury or disability,
2. by reason of being dismissed by reason of redundancy,
3. by reason of a relevant transfer within the meaning of the Transfer of Undertakings (Protection of Employment) Regulations 2006,
4. if the relevant employment is employment by an associated company by reason of a change of control or other circumstances ending that company’s status as an associated company,
5. by reason of the participant’s retirement, or
6. on the participant’s death,

jacko74

Actually I've realised my figures weren't correct and it's even more of a ''rip off'' than I first suggested... the value of shares subject to a tax liability was only £5,800, the £8,100 figure included a number of shares that weren't subject to any tax liability

So after avoiding paying £500 income tax on my earnings when purchasing the shares I've now got to pay £2,100 income tax on the shares themselves instead... seems a deeply unfair way of working to me.

And even if the process is correct I'm still pretty sure that £2,100 isn't 20 percent of £5,800!

Nikkster

They can take the payment by selling shares at the same time your shares leave the employee scheme and are transferred to you - hopefully this will help you feel less ripped off as you'll still have significantly more in shares than you paid out of your wages.

If its any consolation it took a previous employer over 4 years to realise I'd left and sort this out!

Edit: dividend shares are counted for this as not held long enough to be tax free and NI is also deducted

moneysavinghero

If someone wants to rip me off by turning £1800 of my salary into £3700 in 18 months then i am more than happy for them to do so.

20% is only the income tax rate.
NIC is about another 13%

Were you forced to join this scheme or was it voluntary. If voluntary you could have chosen not to join the scheme and you would now be worse off. So not a rip off. You chose to join the scheme (and have even benefited from it). You need to be a bit more glass half full kind of person.

We all have to pay taxes. You chose to exchange some income for a piece of paper. At that point you did not have £1,800 of income so paying tax on the £1,800 does not make sense. At the point the shares were sold you did gain income and so it is correct that you are taxed on the income at the point you received it.

TheAble

I guess these are the rules but I do sympathise with the op. If the shares had been bought using taxed income, whether in an ISA or not, they wouldn't be facing an additional £1600 liability right now. @moneysavinghero you seem to be missing the point a bit.

moneysavinghero

But they did not purchase them using taxed income. That is the point that you seem to be missing @TheAble

TheAble

moneysavinghero said:

But they did not purchase them using taxed income. That is the point that you seem to be missing @TheAble

I'm not missing it. I just feel it would be fairer if the tax was limited to the initial £1800 rather than the growth on top as well.
Overall I like the employee share scheme but I've always thought this particular aspect of it was a bit harsh.

kuratowski

It's really a very strong incentive to hold for at least 3 years, when that is exactly what happens.  After 5 years it is tax free.