Exercising Share Options and Relevant UK Earnings for Pension Tax Relief

SW17

Slightly niche question. When you exercise non tax-advantaged share options from a current or former UK employer, the difference between exercise price and value on day of exercise is subject to UK income tax and NI at the prevailing rate (any further gains, if you don't sell, being subject to CGT).

My question - is this gain amount on exercise which is subject to income tax considered "Relevant UK Earnings" to be eligible for getting tax relief on pension contributions? 

The nearest part of the HMRC definition of relevant earnings relating to pension tax relief is:

employment income such as pay, wages, bonus, overtime, commission (providing it is chargeable to tax under Section 7(2) ITEPA 2003)

This particular case is not specifically included or excluded, so I guess the question is whether it's included under this definition. It's taxed through payroll as PAYE (even after leaving a company, they effectively put you back on the books temporarily to run through payroll and remit you nett proceeds after tax) and is put on self assessment as an employment. 

My thinking is that logically it should be included as Relevant UK Earnings since it's treated as, and taxed as, regular pay/bonus income, but isn't explicitly covered.

Appreciate any insight, especially welcome if anyone can point to any official sources where this is covered.
 

Marcon

SW17 said:

Slightly niche question. When you exercise non tax-advantaged share options from a current or former UK employer, the difference between exercise price and value on day of exercise is subject to UK income tax and NI at the prevailing rate (any further gains, if you don't sell, being subject to CGT).

My question - is this gain amount on exercise which is subject to income tax considered "Relevant UK Earnings" to be eligible for getting tax relief on pension contributions? 

The nearest part of the HMRC definition of relevant earnings relating to pension tax relief is:

employment income such as pay, wages, bonus, overtime, commission (providing it is chargeable to tax under Section 7(2) ITEPA 2003)

This particular case is not specifically included or excluded, so I guess the question is whether it's included under this definition. It's taxed through payroll as PAYE (even after leaving a company, they effectively put you back on the books temporarily to run through payroll and remit you nett proceeds after tax) and is put on self assessment as an employment. 

My thinking is that logically it should be included as Relevant UK Earnings since it's treated as, and taxed as, regular pay/bonus income, but isn't explicitly covered.

Appreciate any insight, especially welcome if anyone can point to any official sources where this is covered.
 

Maybe try asking the question here: https://community.hmrc.gov.uk/customerforums/

Seems to be very much quicker than trying to get a response out of HMRC any other way!

Edit - previous answer was posted while I was typing this so you might already have all the info you need.

SW17

Many thanks both, and particular thanks to @[Deleted User] for the detailed explanation and legislation references. Your references in points #1 and 2 of your reply were the missing pieces in the jigsaw for me. Much appreciated.

Monstera_Leaf

I have the same question. Unfortunately,
HMRC Customer Forum is not working,
@[Deleted User]'s critical references "in points#1 and 2" are no longer visible
Google provides an undefinitive response, namely that these are "generally considered "Relevant UK Earnings" for pension tax relief purposes."

Can anybody help?

DRS1

It would be nice to know what the earlier answer said. You should probably check this with an accountant but I think it counts as relevant UK earnings and my thought process goes like this

The relevant bit of the HMRC manual says relevant UK earnings means employment income but only if it is taxable under section 7(2) of ITEPA (see PTM044100 - Contributions: tax relief for members: conditions - HMRC internal manual - GOV.UK)

Section 7(2) is actually a definition and defines employment income as including anything which is treated as employment income by virtue of Part 7 of ITEPA (see Income Tax (Earnings and Pensions) Act 2003)

Unapproved share options are subject to income tax on exercise by virtue of Chapter 5 of Part 7 of ITEPA (at least that is what the HMRC manual says

EIM11875 - PAYE: special type of income: gains from share options - HMRC internal manual - GOV.UK

EIM12300 - PAYE: employment-related securities: gains from securities options: background - HMRC internal manual - GOV.UK)

The legislation itself is here for anyone who has a brain the size of a planet

Income Tax (Earnings and Pensions) Act 2003

So that suggests to me that the gain subject to income tax on exercise of an unapproved share option counts as relevant UK earnings for pension contribution purposes. What gives me pause for thought is that the manual on pensions (mentioned in para 2 above) doesn't include share options in its list of examples of what qualifies. Where I may be going wrong is that saying x is subject to income tax under Part 7 is not the same as saying x is treated as employment income under Part 7. So now I am doubting myself.

Perhaps someone like @dunstonh has come across this in practice?

Dead_keen

Yes, the gain on the exercise of an unapproved option "counts as employment income". From memory, that is s476. That takes you to s7 and that makes it "employment income". And that is what is part of what makes up relevant UK earnings (per FA 2004 definition). So all good.

Monstera_Leaf

Wow - I think I may need to go and lie down! So complicated.
Thanks @DRS1and @Dead_keen