848.Since 6 April 1999, gains made on share options granted after 5 April 1999, acquired by reason of employment, have been subject to Class 1 National Insurance Contributions (NICs). This does not apply, however, to share options awarded and exercised under an Inland Revenue approved scheme, nor to options where the shares, or the right to acquire shares, are not readily convertible assets, i.e. they are not readily convertible into cash.
849.Whilst companies can plan for NICs on regular pay, it is more difficult for them to plan for NICs on share option gains, particularly where the share price is volatile. Under accountancy rules, companies are required to make a provision in their accounts for the anticipated NICs liability on share options, based on the market price of the shares on the date that they prepare the accounts. Employers have expressed concern that their exposure to a highly unpredictable NIC liability could put at risk their investment strategies, and even make some technically insolvent.
Part IV: National Insurance Contributions Background Share options