Employees that opt for the Government’s new “employee-owner” contract could face an immediate and sizeable income tax bill, warns Ross Welland, a tax partner with accountancy firm, Littlejohn. Their employers may also be liable for an Employers NIC charge.

The new contract aims to reward employees who give up some of their employment rights with shares in the company that will be exempt from capital gains tax when sold. But employees may not be aware that by accepting the new contract they could be liable immediately for income tax on the value of the shares they receive. The proposal was announced by the Chancellor of the Exchequer, George Osborne, in October and confirmed in The Autumn Statement on 5 December 2012 with final legislation in next year’s Finance Bill.

“Under the proposal employees will receive shares worth from £2,000 to £50,000 in exchange for employment rights. Because it will be hard to put a value on employment rights, and the type of shares that can be offered is also very wide, there is a very real prospect that employers may offer shares which far exceed the value of the employment rights given up,” explains Mr. Welland. “However, when the value of the shares granted to employees exceeds the value of the employment rights they give-up, the employee is immediately liable for income tax on the difference in value.”