Significant changes in the tax treatment of Unapproved Share Option Schemes came into effect from January 1, 2024. These changes bring the payroll tax treatment of Unapproved Share Option Schemes in line with other forms of share awards, and are important for both employers and employees who participate in such schemes.

Prior to 1 January 2024

Employees who exercised share options were required to self-assess and pay the relevant taxes (Income Tax, Universal Social Charge (USC), and Pay Related Social Insurance (PRSI)) within 30 days of exercising the option.

Employers were not responsible for deducting these taxes through payroll.

From 1 January 2024 onwards

The responsibility for accounting for Income Tax, USC, and PRSI on share option gains shifts to employers.  Employers will now deduct these taxes through the PAYE (Pay As You Earn) system at the time of exercise, assignment, or release of share options.

Employees will no longer need to self-assess and pay these taxes, as it will be handled by the employer through payroll.
 

Implications for Employers

Additional payroll compliance - Employers will need to track share option exercised by employees and include these details in their real-time PAYE reporting on a timely basis.  Employers will already have been obliged to report share options granted or exercised in the annual RSS1 return but were not required to withhold and pay the tax arising.

Implications for Employees

Employees will experience a more streamlined process as the employer will now handle the tax deductions through payroll.  However, it is important for employees to understand that the share option gains will now be taxed directly through payroll.  The tax on share options exercised in 2023 will still need to be paid by the employee directly through the form RTS01 and also reported on an annual Form 11 Tax Return.  Also, any capital gains tax due on the subsequent sale of shares will need to be paid and reported by the employee, this aspect has not changed. 

Next Steps

Employers should review their current Share Option and Employee Share Purchase Plan arrangements and actual payroll compliance to ensure alignment with these new provisions.
It is advisable for employers to prepare communication for employees about these updates and to ensure understanding of how their share options will be taxed.

We recommend all concerned parties to familiarize themselves with these changes to ensure compliance and to make the most of the new system.

Should you have any queries, please get in touch.