Share Schemes – Introduction
The UK tax authority, HMRC, has recently released new guidance on how individuals should report and pay tax on dividends and capital gains, particularly focusing on shares acquired through employee share plans.
This guidance is especially relevant for those employees who do not typically file a tax return, which includes a significant portion of the UK workforce.
The details of this guidance are outlined in HMRC’s Employment Related Securities Bulletin 56, published in July 2024.
Background
This new guidance comes in the wake of substantial reductions in the tax-free allowances for dividends and capital gains.
- The dividend allowance has been slashed from £5,000 to £500: a 90% reduction;
- The capital gains tax annual exemption has dropped from £12,300 to £3,000: a 75% decrease.
While many employees may still have dividend income below the £500 threshold from their employee share plans, this allowance applies across all dividend income sources.
As a result, an increasing number of employees who receive shares through employee share plans, as well as individuals holding shares generally, are now required to report and pay tax on their dividends and capital gains.
This issue is particularly pressing for companies with all-employee share plans, as most participants in executive share plans are likely already accustomed to completing tax returns.
It’s important to note that tax on dividends and capital gains is not managed through PAYE, meaning it’s up to the employee to report and pay these taxes to HMRC. Failure to do so on time could result in interest charges and penalties.
While the reduction in these tax-free thresholds is a government decision and not the fault of employers, companies need to be aware that employees may become frustrated if they find that their participation in a share plan has become more of a burden due to the increased administrative requirements.
Employers should also ensure that they adequately inform employees about what actions they need to take to comply with these new tax obligations.
Key Points of the New Share Schemes Guidance
General
The new guidance from HMRC, developed in consultation with tax practitioners, aims to address concerns that more UK taxpayers are being drawn into personal tax reporting due to these lower thresholds.
The fear was that without clear guidance, taxpayers might be confused, incur unnecessary costs for tax advice, or face penalties for late or incorrect submissions.
While the need for this guidance stems from the lowered tax-free allowances, it is unlikely that these thresholds will return to their previous levels in the near future.
For Dividends
If an employee does not usually submit a tax return, HMRC now allows them to contact HMRC directly if they have received up to £10,000 in dividends.
The employee can request that their tax code be adjusted so that any tax due on these dividends is collected through PAYE by their employer, rather than by filing a tax return.
While this option offers some relief compared to completing a full tax return, there is no online method to report this, and contacting HMRC by phone can be time-consuming.
Employees who receive less than £500 in dividends do not need to report this income, while those with dividends exceeding £10,000 will still need to file a tax return.
For Capital Gains
Employees can use an online process to report and pay tax on capital gains as they arise. This can be done before the end of the tax year, making it possible to report and settle the tax liability as soon as the gain is realised.
However, the process is not entirely straightforward, requiring multiple steps: employees must register, wait to report, and then wait to be informed of the amount due, each as separate actions.
What Can Employers Do?
General
The complexity of tax reporting may deter employees from holding onto shares acquired through employee share plans, especially if they fear the administrative burden associated with dividend reporting and tax payment, particularly when dividends are paid by non-UK companies.
Employers can take several steps to mitigate this issue:
Reducing Tax Liabilities
Employers can help employees reduce their tax liabilities by advising them on strategies such as selling shares over multiple tax years, transferring shares into an ISA or pension (which also shelters dividend income from tax), or using dividends paid under a Share Incentive Plan to avoid dividend tax.
Additionally, transferring shares to a spouse can be beneficial in some circumstances.
Increasing Awareness and Information
Employers should consider enhancing the information provided to employees about their tax obligations.
While linking to the new HMRC bulletin is a good start, more detailed, tailored communication might be necessary.
This could include step-by-step guides and proactive reminders to take action before key deadlines, such as 31 January 2025, or subsequent years’ deadlines.
Share plan administrators are also likely to produce guidance materials, which employers can use to support their employees. It may be beneficial for share plan managers within companies to become familiar with the processes involved, as employees will likely seek detailed guidance on what exactly they need to do.
Investing in these areas could reap rewards in the long run, as the same guidance and processes are likely to remain relevant in future tax years.
By helping employees navigate these tax obligations, employers can maintain the attractiveness of their share plans and prevent them from becoming a source of frustration.
Share Schemes – Conclusion
HMRC’s new guidance on reporting and paying tax on dividends and capital gains for employee share plan participants is a crucial resource for both employees and employers.
As tax-free thresholds have decreased, more employees are being pulled into the tax reporting net, making it essential for employers to provide clear, timely information to help them comply.
By doing so, employers can help ensure that their share plans continue to be seen as a valuable benefit rather than a burdensome obligation.
Final thoughts
If you have any queries about this article on Share Schemes, or UK tax matters in general, then please get in touch.