New guidance for UK employee share plans on reporting and paying tax on dividends and capital gains

The UK tax authority, HMRC, has issued new guidance on how individuals should report and pay tax on dividends and capital gains targeted at shares which employees have received from employee share plans. These include ways in which amounts can be reported and tax paid if a tax return is not separately required (which is still the case for a large proportion of the UK employee population). The new guidance is contained in HMRC's Employment Related Securities Bulletin 56: Employment Related Securities Bulletin 56 (July 2024)

Background

The background to this new guidance is the significant reduction over the last few years of both the individual tax-free dividend allowance from £5,000 to £500 (a 90% reduction) and the reduction of the individual tax-free capital gains amount from £12,300 to £3,000 (a 75% reduction). Although many employees will still have below £500 in dividends from their employee share plan shares, this is an overall limit on dividends from all sources.

Because of this, far more employees with shares received under employee share plans (as well as individuals generally holding shares) are therefore likely to have to report and pay tax on their dividends and capital gains. The problem is particularly acute where companies operate all-employee plans as most executive share plan participants are already likely to be completing a tax return.

Importantly, paying tax on dividends and capital gains are not PAYE liabilities that employers take care of with minimal action by employees, as is the case with most employee benefits. With dividends and capital gains, it is up to the employee to take the relevant steps with HMRC, and interest and penalties are likely to become payable if this is not done in time.

While no employee would blame their employer for the fall in these limits which are set by the Government of the day, employers do need to be careful that they do not get caught up in employee frustration that an employee share plan has moved from being a benefit to a millstone when employees' time (and potentially cost) in making returns is taken into account – and also that employers do not get blamed for not alerting employees in good time to what they need to do and pay.

New guidance

HMRC's bulletin has been produced following consultation with practitioners who were alarmed that the reduction in these limits meant that more and more UK individuals are drawn into personal tax reporting and payment obligations and that failure to address this would lead to taxpayers being confused, having to seek tax advice unnecessarily or at disproportionate expense, or, worse be exposed to interest and penalties with the stress of being chased by HMRC. It is part of a wider drive to ease processes all-round. While the root cause of the need for this, is the lowering of the UK's de minimis levels before tax on dividends and capital gains can arise, in the current climate the return of these levels back to where they were looks optimistic.

The effect of the new guidance (which is directed at employee share plan participants, but is of general application for individual taxpayers) is as follows:

Dividends

If an employee is not already submitting a tax return, HMRC allows an employee to contact HMRC if they have received up to £10,000 in dividends and arrange for their tax code to be altered so that tax due on those dividends can be collected by their employer under PAYE rather than through having to submit a tax return. While this seems generous compared with completing a full tax return year on year, there is no online way to report this and employees will be aware of the headline reports of the time which it takes to contact HMRC by telephone and so this is still not a painless solution. Employees receiving below £500 in dividends would still not need to report their dividends while those receiving over £10,000 will have to submit a tax return.

Capital gains

Here there is an online process for reporting capital gains and paying tax as and when gains are made (and which can be done before year end so can be submitted as and when the gain is made). However, there is still a large amount of information that is required, and reporting and paying tax is not a one-stage process. Employees need to register, wait to be able to report and then wait to be advised of the amount due, all in separate stages.

What other action can be taken?

The main concern is that holding shares now just becomes too complicated for employee share plan participants, reducing the incentive to hold onto shares so that they just take matters into their own hands and sell shares to avoid dividend reporting/tax payment issues, particularly when dividends have been paid by non-UK companies. This is something that all those operating employee share plans would want to prevent. How can this be avoided?

First, employers (and employees) can take several steps to reduce tax liabilities in the first place. There are a number of ways in which capital gains can be sheltered including selling shares over several tax years, putting shares into an ISA or pension pot (which also removes tax on dividends) and tax on dividends can be avoided by using dividend shares under a Share Incentive Plan to pay dividends under that plan. Spouse transfer may also be useful.

Secondly, employers should think about increasing the information that they give employees. Linking to the new bulletin will certainly be a start and is a good and quick way to increase awareness, but communications may need to be more tailored with step-by-step guides and active encouragement to take action in good time before 31 January 2025 or the relevant 31 January in later tax years. Share plan administrators will also actively be producing guides, which can be used. In any event, it may be useful for share plan managers within companies simply to be aware of the processes that are necessary for colleagues who do not already complete tax returns. It will, after all, be the details and exactly what to do that employees will seek information on. An investment in this area should pay off as the same guidance and processes are likely to apply in future years.

For more information, help or advice please contact us.

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