An unapproved option is an option which does not have tax favoured status under an approved executive option plan, an approved savings option plan or under an enterprise management incentive option plan but they are very flexible and simple to administer.

On exercise of the option, income tax will be charged on the difference between the market value of the shares at the date of exercise of the option and the option exercise price.

HMRC Tax implications of Stock Options versus RSUs

Unless withholding obligations apply, see below , the income tax is payable by the employee through their self assessment tax return for the relevant tax year. Broadly, there are withholding obligations for the employing company if at exercise the shares under option are in a listed company, a company which is controlled by a privately held company, or if there are arrangements for that company to be sold or for its income to be listed.

The shares are regarded as "readily convertible assets" "RCAs".

Stock Options and self assesment? | AccountingWEB

If the shares are in a privately owned company and there are no arrangements for it to be sold, then there is no withholding obligation. Withholding takes place by the employing company under the PAYE system, and if the option holder does not ensure that the employing company is funded for the income tax within 90 days of the end of the relevant tax year the employee can have a tax on tax charge through the employee's tax return.

It is usual to provide a mechanism for withholding in the option documentation. The exercise of options must be reported by July 6 following the end of the relevant tax year by filing an annual return on the HMRC website.

There will also be national insurance contributions "NICs" liability for the employee and the employer on the amount of the option gain if the shares are RCAs. The rate of employer's NICs is currently It is possible for the employer's NIC liability to be transferred or reimbursed by the employee.

This will increase the overall tax liability for the employee on the exercise of the option but an income tax deduction is available in respect of the amount of the gain on which the employee pays the employer's NICs.

Stock Options - IRAS

The effective rate of tax and NICs is On the sale of shares there will be a charge to capital gains tax "CGT" for individuals who are resident in the tax year of disposal on the difference between the price received for the sale of the shares and the aggregate of the market value on the date of exercise of the option.

If an unapproved option is exercised and the shares sold on the same day, there will normally be no capital gains tax to pay.

Tax and Employee Share Schemes: Overview - gohabizaw.web.fc2.com

In reality this relief may be of limited use for employee option holders. The employing company may be able to claim a corporation tax deduction for the amount of the option gain in certain circumstances. Enterprise Management Incentive Options. Starting a Tech Business - a Legal Guide PDF.