Taxation of employment related shares
Restricted shares
Your employer may place a restriction on when you can dispose of your shares. This can include shares you acquired on the exercise of a share option. These shares are known as restricted shares. Restricted share schemes are also sometimes referred to as 'clog schemes'.
If you have been awarded restricted shares, you are required to retain your shares for a fixed period of at least one year. You are not permitted to dispose of your shares during this period, except in limited circumstances (such as death or company reorganisation). You are deemed to have disposed of your shares if you:
- sell them
- transfer or pledge them to someone else
- use them as a guarantee for a loan.
Taxation of restricted shares
Normally the amount chargeable to tax is the difference between:
- the market value of the shares at the date of acquisition
- and
- the price (if any) paid by you.
You must pay Income Tax, Universal Social Charge (USC) and Pay Related Social Insurance (PRSI) on the date of acquisition of the restricted shares.
To take account of the restriction placed on you from disposing of your shares, the amount chargeable to tax is reduced. The amount of the reduction is between 10% and 60% depending on the length of the restriction period.
Reduction of Income Tax, USC and PRSI by length of clog period
| Number of years of restriction | Amount of reduction |
|---|
|
1
|
10%
|
|
2
|
20%
|
|
3
|
30%
|
|
4
|
40%
|
|
5
|
50%
|
|
More than 5 years
|
60%
|
Your employer will make the necessary deductions through payroll and pay the tax directly to the Collector-General.
Change or removal of restriction
The restriction may be changed or lifted before the end of the agreed restriction period. If this happens then the amount of Income Tax, USC and PRSI you paid on the date the shares were awarded must be adjusted. The adjustment must take account of the actual period the restriction was in place. For example, if the restriction period is changed from four years to two years, the reduction rate changes from 40% to 20%.
Employers who processed the entitlements through Pay As You Earn (PAYE) payroll are required to make the adjustments through payroll:
- to the initial award
- or
- to the share allotment.
Your employer will not make these adjustments if the initial award or share allotment was not dealt with through payroll. In this case, you must inform Revenue of any additional Income Tax, PRSI and USC due. You can contact Revenue:
Capital Gains Tax (CGT)
If you dispose of your shares, you may be liable to CGT. You must report this disposal to Revenue, even if no tax is due. Your employer will not deduct any tax or report the disposal for you.
- Example 1
Margaret was awarded 5,000 free shares by her employer on 01 January 2021. The market value of the shares at that time was €10,000 (€2 per share).
Under the terms of the award, the shares cannot be disposed of for a period of four years.
Margaret’s employer adds the value to her pay in the next payroll period. Margaret pays Income Tax at the higher rate of 40%.
Margaret’s tax on shares
| Description | Calculation | Amount |
|---|
|
Market value of shares
|
|
€10,000
|
|
Reduction given for 4 years (40%)
|
€10,000 x 0.4
|
€4,000
|
|
Amount chargeable
|
€10,000 – €4,000
|
€6,000
|
|
Income Tax (40%)
|
|
€2,400
|
|
USC (8%)
|
|
€480
|
|
PRSI (4%)
|
|
€240
|
|
Total taxes
|
|
€3,120
|
If Margaret sells the shares after the restricted period for more than €10,000, she is liable to CGT.
- Example 2
Jane was awarded 5,000 shares by her employer on 01 January 2021. The market value of the shares at that time was €15,000 (€3 per share). Jane paid €5,000 for the shares (€1 per share).
Under the terms of the award, the shares cannot be disposed of for a period of three years.
Jane’s employer adds the value to her pay in the next payroll period. Jane pays Income Tax at the higher rate of 40%.
Jane’s tax on shares
|
Description
|
Calculation
|
Amount
|
|
Market value of shares
|
|
€15,000
|
|
Deduct amount paid by Employee
|
|
€5,000
|
|
Original amount chargeable
|
€15,000 - €5,000
|
€10,000
|
|
Reduction given for 3 years (30%)
|
€10,000 x 0.3
|
€3,000
|
|
Reduced amount chargeable
|
€10,000 – €3,000
|
€7,000
|
|
Income Tax (40%)
|
|
€2,800
|
|
USC (8%)
|
|
€560
|
|
PRSI (4%)
|
|
€280
|
|
Total taxes
|
|
€3,640
|
- Example 3
Andrew was awarded 5,000 free shares by his employer on 01 January 2021. The market value of the shares at 01 February 2021 was €10,000 (€2 per share).
Under the terms of the award, the shares cannot be disposed of for a period of five years and two months.
Andrew paid the higher rate of Income Tax (40%) and USC at 8% in 2021. Andrew’s employer made the necessary deductions through payroll.
Andrew’s tax on shares in January 2021
| Description | Calculation | Amount |
|---|
|
Market value of shares
|
|
€10,000
|
|
Reduction given for 5+ years (60%)
|
€10,000 x 0.6
|
€6,000
|
|
Amount chargeable
|
€10,000 – €6,000
|
€4,000
|
|
Income Tax (40%)
|
|
€1,600
|
|
USC (8%)
|
|
€320
|
|
PRSI (4%)
|
|
€160
|
|
Total taxes
|
|
€2,080
|
The restriction on the disposal of the shares is lifted on 30 March 2023.
As Andrew’s employer processed the initial award through their payroll, they will account for the revised amount through payroll. The revised amount will account for Income Tax, USC and PRSI that should have been chargeable on the acquisition.
Andrew’s revised tax on shares
| Description | Calculation | Amount |
|---|
|
Market value of shares
|
|
€10,000
|
|
Revised reduction given for 2 years (20%)
|
€10,000 x 0.2
|
€2,000
|
|
Amount chargeable
|
€10,000 – €2,000
|
€8,000
|
|
Income Tax (40%)
|
|
€3,200
|
|
USC (8%)
|
|
€640
|
|
PRSI (4%)
|
|
€320
|
|
Total taxes
|
|
€4,160
|
|
Deduct taxes already paid
|
|
€2,080
|
| Tax payable |
€4,160 - €2,080 |
€2,080 |
Next: Forfeitable shares