As anticipated, Tuesday's budget has introduced far reaching charges to the taxation of employee share incentives.

Main Changes

Changes announced in the budget which will impact on share incentives include:-

  • Replacement of the Income Levy and the Health Levy with a Universal Social Charge (USC)
  • Removal of the ceiling on employees' PRSI.
  • Abolition of the tax relief for grants and exercises of options under Approved Share Option Plans, effective from 24 November 2010.
  • Application of USC and PRSI to appropriations of shares under Approved Profit Sharing Schemes from 1 January 2011 (the income tax exemption remains unchanged).
  • Application of USC and PRSI to options under Approved Save-As-You-Earn Share Option Schemes from 1 January 2011 (the income tax exemption remains unchanged).
  • Application of USC and PRSI to unapproved share options and other share awards from 1 January 2011.
  • Extension of PAYE tax withholding to employee share awards from 1 January 2011.

USC and PRSI

USC is a universal social charge payable on gross income (after relief for certain capital allowances but before pension contributions).

USC will be charged at the following rates (for employees aged under 70):-

Up to €4,004 pa – exempt

Up to €10,036 pa – 2%  

€10,037 to €16,016 pa – 4%  

In excess of €16,016 pa – 7%

USC replaces the Income Levy and the Health Levy, which will be abolished. USC will be collected through PAYE by employers and through the self-assessment system for the self-employed.

The employee PRSI ceiling of €75,036 is to be abolished, so the 4% employee PRSI rate will apply to all relevant earnings. The employer's PRSI rate of 10.75% remains unchanged.

Commentary

Undoubtedly, the introduction of PRSI and USC for share incentives across the board increases the tax burden on employees. In particular, the changes erode some of the tax savings for approved plans, although approved schemes will still provide a substantial tax saving for participants.

The application of employer's PRSI to all share awards is a significant increase in the cost of providing such schemes for employers. Employers may have to consider scaling back the amounts available for investment in such schemes to reduce overall employer costs.

Employers will need to introduce procedures for the collection and payment of tax on share awards and will need to update the tax treatment outlined in any documentation circulated to employees.

Employers and employees should also give consideration to the question of whether there is scope to exercise options or receive share awards prior to 31 December 2011 to mitigate the tax costs. If you have any queries on the provisions in Budget 2011 please contact a member of our share schemes team.

Note: While every care has been taken in the preparation of this tax update, the above information is a general summary only of the provisions described in budget 2011 and should not be taken as tax advice. The applicable tax treatment of share incentives will be affected by the provisions of the Finance Act when passed. Your tax position will depend on your circumstances. If you have any queries on your tax position you should seek individual tax advice.