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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I work for an American NASDAQ listed company. I am resident

Customer Question

I work for an American NASDAQ listed company. I am resident and work in the UK for this company. I pay income tax in the UK and my annual earnings are £100K approx. i have no other earnings and no other allowances.
I have some share options that I have earned as part of my employment with this company The shares are managed using an online service called ETRADE. When I use the calculator on this trade console it shows that I will need to pay 53% of the sales price as Tax withholding. Is this correct that 53% is accurate.. The government are entitled to more than i am for my shares?
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.

Hi.

When you mention withholding tax, are you referring to UK or US tax?

If you are referring to UK tax, then the share options you have from your US employer are probably part of an option scheme which is not an approved scheme as far as HMRC in the UK is concerned. You can read about the different types of share option scheme here, here and here.

As the scheme you are participating appears to be un unapproved one, when you exercise the option, you will pay income tax and national insurance contributions on the difference between the sum of what you paid for the option when it was granted, if anything, and the amount you paid for the shares on exercise and their open market value on the day of exercise. So, you will probably pay at least 40% income tax and 2% in NICs on the paper profit. The ETRADE calculator has assumed you will pay NIC at 12% but that is only paid on earnings up to £41,865. The excess is charged at 2%. As you earn around £100,000 per annum, you are already into the 2% NIC band.

If you exercise the option and hold on to the shares, then your cost for Capital Gains Tax purposes will be the sum of what you paid for the option when it was granted, if any, the amount you paid for the shares on exercise and the amount on which you paid income tax. Only any increase in value of the shares over and above that figure will be liable to CGT when you sell them.

If your income is above £100,000, you start to lose your personal allowance at the rate of £1 for every £2 of income above £100,000. The share option gain will, therefore, have an impact in that regard.

I hope this helps but let me know if you have any further questions.

Customer: replied 2 years ago.

okay the Tax is UK withholding, though i'm not sure I understand your explanation of how the Share Options are treated if I exercise and sell immediately as opposed to exercise and hold.

What happens for example if I have 50,000 options granted at $20 and I execute 50,000 at the same time at $50.

how should i be taxed on this assuming my earnings are £101K and I have no other earnings and no other allowances?

Expert:  TonyTax replied 2 years ago.

On exercise, the gain which will be a paper gain unless you sell the shares will be subject to tax and national insurance contributions. Most people have to sell at least some of the shares to finance the tax and NIC charge.

Based on your figures, you will make a gain of $1.5 million which is about £957,000. You will pay tax at 40% on £49,000 (£19,600) and at 45% on £908,000 (£408,600) plus NICs at 2% on £957,000 (£19,140), a total of £447,340.

You should read the notes here and check whether you signed an agreement to pay your employer's secondary NIC liability. If you did, that will impact on the tax and NIC figures above by reducing the amount you pay tax an NIC on.

If you were able to fiance the tax and NIC charge without selling any of the shares, any future growth in the value of the shares will be subject to CGT on disposal. If, however, you sell all the shares on exercise, there will be no capital gain.

Expert:  TonyTax replied 2 years ago.
Hi again.

It's been a few days since I answered your question. Is there anything you need further clarification on?

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