UK: The 2003 Budget - Tidying Up Employee Share Schemes

Last Updated: 10 April 2003

The Chancellor did not have much scope in this year's Budget for giving away substantial new tax reliefs on employee share schemes but he has announced a raft of tidying up changes which are expected to give a modest £5m tax relief in total each year.

Whilst some of the changes are pure anti-avoidance there are a number of interesting changes which will have a significant impact on the design and operation of schemes over the years to come.

All changes take effect immediately unless otherwise stated.

Reversal of Mansworth v Jelley

Mansworth v Jelley, which was decided in December 2002, is reversed where unapproved options (and EMI options) are exercised on or after 10 April 2003. This will alleviate the unfairness to UK resident trusts which, on satisfying unapproved share options, have been liable to pay capital gains tax calculated on the basis of the market value of the shares delivered rather than the exercise price paid by employees. On the other hand, unapproved (and EMI) option holders will no longer be able to take advantage of the artificially enhanced base cost in computing the gains on a subsequent disposal of the shares so as to reduce the amount of chargeable gains. Nevertheless, the exercise of unapproved options before 10 April 2003 may still result in corrective returns and a reduction of tax.

Approved Share Option Schemes

The rationale for some of the features of approved share options has disappeared over the years, particularly the three year rule excluding income tax relief where an option is exercised within three years of a previous tax exempt exercise. The Chancellor now proposes changes which will bring approved share options in line with the design of other all-employee approved schemes and will also make changes which prevent NIC abuse in the use of approved share option schemes. The restructuring of approved share options is as follows:

  • in the initial three years after grant, good leavers (ie, those who leave on account of injury, disability, redundancy or retirement) will in future be entitled to income tax and NICs relief on option gains (and will thus be brought into line with the position of good leavers under SAYE schemes and SIPs). Exercise in all other circumstances in the initial three years after grant - apparently including exercise on a takeover or scheme of arrangement - will in future be subject to PAYE and NICs. At present, income tax through self-assessment arises but this will in future be limited to private company shares where there is no market for the shares
  • from three years after grant, approved options may in future be exercised income tax and NICs free in whole or in part on as many occasions as the option holder may wish (regardless of whether a tax-exempt option has been exercised in the past three years)

There will also be new rules which will allow bridging finance arrangements to be included as part of an approved share option scheme without the difficulties which arise at present.

The tax changes on approved share option schemes will require changes to employee guides and tax notes with immediate effect. In addition, notices of exercise will in future need amendments to ensure that PAYE and NICs can be deducted where necessary.

Partnership shares under SIPs

In future, participants in a partnership share offer will be able to make a single annual purchase of shares. At present, there is a monthly limit of £125 a month (or 10% of salary, if less) and this has to date prevented companies using annual bonuses for the purchase of shares. For some companies, scrapping the obligation to offer partnership shares each month may considerably simplify the operation of partnership share offers and reduce costs.

There will also be greater flexibility from employers to exclude overtime payments and other variable pay in calculating the statutory 10% of salary limit in the operation of partnership share offers.

The above proposals may require amendments to the rules of SIPs operated by clients but as these proposals reflect changes to the legislation it should generally be possible to make the amendments without shareholder approval. These changes will take effect from Royal Assent to the Finance Act 2003.

SIPs generally

There have been problems where employees in a Group have been transferred to another Group company that also operates a SIP, since the rules have previously prevented an individual participating in more than one SIP in any tax year. The legislation will now be changed so that there will be greater flexibility where such internal reorganisation takes place.

Again, changes will be needed to scheme rules but this should not generally require shareholder approval. ThIs change will take effect from Royal Assent to the Finance Act 2003.

Dividend Shares under SIPs

The holding period for dividend shares (accumulated dividends) under SIPs will, in future, correspond to the holding period for the free, matching or partnership shares in respect of which the dividend shares arise. The Revenue consider this change will facilitate administration and reduce costs.

This change will take effect from Royal Assent to the Finance Act 2003.

SAYE Scheme

On a takeover or scheme of arrangement, there have in the past been problems where employees have been transferred to "associated companies". Such employees will now be able to exercise on leaving employment with an associated company in the same way as if he or she had left employment with the original employer.

This change will take effect from Royal Assent to the Finance Act 2003.

Approved Schemes generally

The Chancellor proposes a number of simplifications of the procedures for Revenue approval of approved share schemes:

  • It will no longer be necessary to obtain formal approval of any new scheme which is implemented in exactly the same form in which preliminary approval has been given by the Inland Revenue. Provided there are no changes to the scheme after preliminary approval has been given, the scheme will be approved by the Inland Revenue with effect from the date on which it is established by the company. This will facilitate the immediate grant of options following the establishment of a new scheme and also reduce the costs to companies.
  • Only amendments to key features of any existing scheme will require Inland Revenue approval in future, bringing the CSOP and SAYE legislation into line with that of the SIP. This will also reduce the costs to companies. "Key features" will not include purely administrative features. Changes will be needed to scheme rules but this should not generally require shareholder approval. These changes will take effect from Royal Assent to the Finance Act 2003.

The "material interest" rule will also be brought into alignment in all approved schemes. Under the material interest rule, employees cannot participate in a scheme if, together with their associates, they hold more than a certain percentage of the share capital of the company. This is thought likely to be brought into line in approved share option schemes at the 25% threshold applying to SAYE schemes and SIPs, but the percentage will be confirmed in the Finance Bill.

Unapproved Employee Share Schemes

Where PAYE and NICs apply in respect of an unapproved employee share scheme, the employer is liable to deduct the PAYE and any employee NICs through payroll. If there are insufficient earnings to make a deduction, or if the employee fails to authorise a deduction and make good the PAYE within 30 days following the exercise of the option or receipt of shares, the employee is treated as receiving a benefit equal to the amount of the unrecovered PAYE and NICs. Employees will in future have 90 days to refund PAYE to their employer without incurring a benefit in kind.

At present, there is a limit on the amount of employee NICs that may be recovered each month from an employee. That limit is being abolished and employers will, in future, be able to recover all employee NICs on share-based earnings at one time. In addition, recovery may be made over an extended period into the following tax year. This is intended to assist employers in view of the 1% NIC increase operative from 6th April 2003.

To improve reporting procedures in respect of unapproved employee share schemes, not only the employer but also any issuing company and any UK "host" company in respect of employees of foreign corporations will in future be obliged to provide information on unapproved employee share scheme gains.

Anti-Avoidance Provisions

The Revenue will have new powers to calculate share-based gains by making adjustments of artificial transactions which have reduced the amount of gains or otherwise involved a manipulation of share-related benefits. This change will take effect from 16 April 2003 (for tax) and an appointed day after Royal Assent to the Finance Act 2003 (for NICs).

In addition, gains acquired by employees where any value accrues as a result of the lifting of restrictions, or where shares are convertible into other more valuable shares, will in future be subject to tax based on the amount of the gains accruing as a result of the transaction rather than the total gains over the period of ownership.

This change will take effect on an appointed day following Royal Assent to the Finance Act 2003.

Other proposals to be included in the Finance Bill

There are other proposals to be included in the Finance Bill which have previously been announced and which will have an impact on the design of share schemes:

  1. restrictions on the deductibility of payments into employee share trusts (see our briefing on Corporation Tax Relief for the Cost of Employee Share Schemes).
  2. the new statutory corporation tax deduction (see our briefing on Corporation Tax Relief for the Cost of Employee Share Schemes).
  3. Treasury Shares - which we believe will lead to a diminution in the usefulness of employee share trusts (see our briefing on Treasury Shares).

Article by Colin Chamberlain

© Herbert Smith 2003

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.