Employee share schemes are frequently used as a method of attracting, rewarding, and retaining key employees. However, without effective planning, they may create unexpected tax liabilities for the employee and administrative headaches for the employer. One key tool that helps avoid these pitfalls is the Section 431 election—a simple but vital document that’s often overlooked. In this article, we explain why Section 431 elections matter, how they work, and how your company and employees benefit from using them correctly.
What Happens Without a Section 431 Election?
When an employee acquires shares via their employment, HMRC may treat them as “restricted securities”. This means the shares have conditions that affect their value, such as:
Although the shares may be worth little when acquired, the restrictions could lift in the future. Consequently the shares could increase in value. Without a Section 431 election, HMRC can tax that increase as employment income, not a capital gain. As a result, this could mean a much larger tax bill than previously anticipated.
What Does the Section 431 Election Do?
The Section 431 election allows the employee and employer to elect to be taxed on the full unrestricted market value of the shares at the time of acquisition, not when those restrictions are lifted. This means:
Why Section 431 elections matter when issuing shares to your employees becomes obvious, once you consider the pain of an unexpected income tax bill. Moreover the employee may not have sold the shares and have the cash to pay the tax liability.
14 days to take action: No extensions
Timing of the lection is critical. The election must be signed and dated within 14 days of the share acquisition. What's more. this is a hard deadline and cannot be extended.
That’s why we advise our clients to include the Section 431 election in the share issue paperwork. Employees should never delay in signing the election once they receive their shares.
An Example
John receives restricted shares worth £1 per shares in Finch Ltd today. He accepts them without making a Section 431 election.
Two years later, the restrictions lift, and the shares are worth £10 each. HMRC will tax the £9 increase as income, not as a capital gain.
That could mean an income tax and NIC liability of 47%, compared to a 24% capital gains tax rate.
Now multiply that by thousands of shares, and the tax difference becomes significant.
This clearly shows why Section 431 matter and are important for tax planning and risk mitigation.
Summary
If you're offering EMI options, growth shares, or other arrangements involving restricted securities, this election should be standard procedure. Therefore adding it to your share scheme checklist or due diligence process is a smart move.
The use of a Section 431 election comes down to one thing: mitigating your future tax position. It’s a small document with big consequences.
If your company is issuing shares, make it part of your standard onboarding. Alternatively, if you're an employee receiving shares, ask your adviser immediately. A Section 431 election doesn't always save tax today, however it often saves much more tax tomorrow.
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And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].
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