The tax and national insurance are collected through the PAYE system. Income tax and employer's national insurance are charged if the shares are acquired at their market value but payment for them is deferred. This charge does not apply to employees who earn at a rate of less than 8,500 a year and are not directors. If shares are acquired by the exercise of an option, the employee is liable to income tax when the option is exercised. The charge is on the difference between the market value of the shares when the option is exercised and the price paid for the shares, less any amount paid for the option.
National insurance is charged where the shares are readily convertible assets.
Where the option can be exercised more than ten years after it is granted, income tax may be charged on the grant of the option. The charge is on the market value of the shares at the date the option is granted, less the price to be paid for the shares on exercise and any amount paid for the option. Any income tax paid at this time can be deducted from the tax payable when the employee exercises the option. There is no charge if the option is granted at a price equal to the market value of the shares at the grant date. National insurance is charged if the shares are readily convertible assets.