60% tax paid on shares from the sale of a company - is this correct?

angelfire

Hi there, my husband had shares in the company he worked for. This company has now been sold/taken over and the shares he had, have been paid on his payslip with his salary for that month and have been taxed at 60%. 

Is this correct? We know nothing about taxes etc and the finance person they have there isn’t qualified, although they are very good and it is he who has sorted everything out. 

I’m just wondering if anyone can help or point me in the right direction please?

many thanks! 

EdSwippet

angel fire said:

Hi there, my husband had shares in the company he worked for. This company has now been sold/taken over and the shares he had, have been paid on his payslip with his salary for that month and have been taxed at 60%. 

From this, it sounds like these were either vested but unexercised stock options, or perhaps unvested stock options or RSUs (restricted stock units), rather than company stocks that he already held. Where a company is sold, these might be cancelled, with the balance paid as PAYE salary.

Can you confirm exactly what your husband held that was sold for cash on the takeover?

When paying stock option income as PAYE, most companies apply a high tax rate on the payroll run 'just in case'. So 55-60%, to cover a generalised worst case 45% tax plus some NI (potentially also employer's NI, if the company has elected to transfer its NI liability on stock options to employees).

What happens next varies. In helpful cases, the company's payroll department will apply whatever adjustments are necessary to ensure that the right amount of tax is paid. Often that means getting some cash back from the previous month's over-withholding. Otherwise, you end up squaring all of this away at the end of the tax year, perhaps via self-assessment, so that in the end the tax comes out right across the year.

One final point. There is a real 60% UK tax bracket at £100k-£125k or so, due to the tapering of annual tax free allowance at that income range. In this case, even 60% withholding won't cover the full liability once you add NI payments on top. In that tax bracket, even more so than in 40% tax, it is well worth making additional pension contributions to offset this confiscatory 63.25% combined tax and NI rate.

angelfire

EdSwippet said:

angel fire said:

Hi there, my husband had shares in the company he worked for. This company has now been sold/taken over and the shares he had, have been paid on his payslip with his salary for that month and have been taxed at 60%. 

From this, it sounds like these were either vested but unexercised stock options, or perhaps unvested stock options or RSUs (restricted stock units), rather than company stocks that he already held. Where a company is sold, these might be cancelled, with the balance paid as PAYE salary.

Can you confirm exactly what your husband held that was sold for cash on the takeover?

When paying stock option income as PAYE, most companies apply a high tax rate on the payroll run 'just in case'. So 55-60%, to cover a generalised worst case 45% tax plus some NI (potentially also employer's NI, if the company has elected to transfer its NI liability on stock options to employees).

What happens next varies. In helpful cases, the company's payroll department will apply whatever adjustments are necessary to ensure that the right amount of tax is paid. Often that means getting some cash back from the previous month's over-withholding. Otherwise, you end up squaring all of this away at the end of the tax year, perhaps via self-assessment, so that in the end the tax comes out right across the year.

One final point. There is a real 60% US tax bracket at £100k-£125k or so, due to the tapering of annual tax free allowance at that income range. In this case, even 60% withholding won't cover the full liability once you add NI payments on top. In that tax bracket, even more so than in 40% tax, it is well worth making additional pension contributions to offset this confiscatory 63.25% combined tax and NI rate.

Thankyou for your reply, your help is very much appreciated! So upon asking your questions above, it seems that he never held formal shares. He had a verbal agreement with the outgoing MD, that he would receive 15% if the same price of the business. 

Does that she’d any more light on it? 

EdSwippet

angel fire said:
...So upon asking your questions above, it seems that he never held formal shares. He had a verbal agreement with the outgoing MD, that he would receive 15% if the same price of the business. 

Does that shed any more light on it? 

A bit. At least, it might help to explain why there's income tax rather than capital gains tax. However, it's entirely unclear to me how such a 'verbal' agreement would work in practice, both with the company and with HMRC, since it appears there's no formal process here. (Treating this as PAYE income is, if nothing else, easily defensible from HMRC enquiry, since it seems very hard to categorise as any form of tax avoidance!)

Not much more to say then. Hopefully, armed with the above, you can square it all away to get the correct outcome. That might involve an end-of-year self-assessment tax form, but it shouldn't be too challenging. The main aim is to get accurate end-of-year income and tax numbers from the company. That's much more important than having them withhold the "right" tax. With the right numbers you can get the tax right yourselves, but without, you're adrift.

Remember that the aim of a tax code is to try to get tax paid through PAYE to be accurate, but there are a lot of edge cases where that doesn't work, so that some form of year end balancing or tax self-assessment is necessary to get the right results.

angelfire

So are you saying he’s been taxed correctly then? Or do we need to do something in order to sort it out? I’m a bit confused! 

EdSwippet

angel fire said:

So are you saying he’s been taxed correctly then? Or do we need to do something in order to sort it out? I’m a bit confused! 

Not necessarily correctly yet. That might get straightened out in future PAYE payroll runs, which can include a refund for a previous run's over-withholding. Or it might mean that you have to go through self-assessment or something similar with HMRC to get the right result.

Given your description of this as a 'verbal agreement', it's difficult to tell as a company outsider what the right tax result even is. The company must have some idea, and it might be quite right, but none of us can say. The closest I can see this mapping to, without further information, is RSU income, which is taxed as normal income. No way of knowing whether this is right from here though.

angelfire

ok, thank you so much for your help!