Explained: What You Need to Know About New Employee Share Option Obligations

Explained: What You Need to Know About New Employee Share Option Obligations

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Employers in Ireland are now responsible for handling tax payments when employees cash in on share options. The new rules that came into force on 1st January 2024 further extend the system of withholding personal taxes through payroll, which covers Income Tax, Universal Social Charge (USC) and Pay Related Social Insurance (PRSI).

Announced in last autumn’s budget, the news prompted some concerns from industry bodies about the rising administrative burden placed on employers. But what exactly do the changes cover, and what do they mean for you?

Background

The new rules relate to unapproved share options held by employees of a business. Unapproved share schemes are those that don’t benefit from ‘approved’ tax breaks. So-called approved share schemes in Ireland include Approved Profit Sharing Schemes (APSS), Save As You Earn (SAYE) and Employee Share Ownership Trusts (ESOTs). There are also beneficial tax treatments available under the Key Employee Engagement Programme (KEEP).

Up until the end of 2023, it was up to employees to report taxable income to Revenue when they realised unapproved shares, and then settle the tax liability directly. Employees had 30 days to do this from the date of their share option being exercised, and did so by submitting a Relevant Tax on Share Options form (RTSO1).

But under the new system, responsibility switches from employees to employers, who are obliged to remit any tax owed to Revenue through payroll deductions.

An Extra Burden?

Two things stand out to suggest that employers should not be overly concerned about the potential extra administrative burden this change creates for them. One is the fact that it only applies to the exercise of shares issued under unapproved schemes. Approved scheme shares and shares granted under the KEEP initiative are exempt from Income Tax anyway and there is therefore no accounting requirement for tax purposes when they are realised.

While businesses have to go through an approval process to be able to issue approved shares, the tax incentives make them very attractive both to employers and employees. This benefit comparison keeps a natural cap on the number of unapproved shares being issued.

Second, employers have always had to account for the granting of unapproved shares anyway. A share counts as a taxable benefit unless it is given an exemption under an approved scheme. That means that anyone in receipt of an unapproved share has to pay Income Tax, USC and PRSI anyway. And this has always fallen to employers to make the deductions through payroll.

The extension of the scheme so employers now also handle tax as deductions from payroll when those same shares are realised will in practice not be a huge additional burden. The reporting obligations will remain exactly the same – employers have always used form RSS1 to report the granting, exercise, transfer or release of unapproved shares. It’s simply a case of extending reporting of exercised shares to withholding tax owed via the payroll system.

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