HMRC have released Employment-Related Securities (ERS) Bulletin 63, which contains important information on changes to the net settlement reporting requirements for Employment-Related Securities (ERS).
Net settlement and annual reporting requirements
HMRC are changing how Employment-Related Securities (ERS) net settlement should be reported.
- As part of ongoing evaluation to identify process simplifications and reduce the administrative burden for employers, HMRC have been reviewing the net settlement reporting requirement.
- Following consultation with stakeholders, it has been agreed that the current net settlement reporting requirement will be amended to remove double-line reporting.
What is net settlement?
Employers usually have an obligation to account for Income Tax and National Insurance Contributions (NICs) through PAYE when employees acquire securities under a non-tax advantaged employee share plan or other arrangement.
- The employer must then recover from relevant employees:
- Income Tax.
- Employee NICs.
- Employer NICs.
- This may be done by the employee selling some of the securities they beneficially acquire to yield sufficient cash to reimburse their employer.
- This is often referred to as 'sell to cover' and results in the employee getting beneficial ownership of the securities subject to the award, although a portion of these is immediately sold.
- Alternatively, the employer could recover the Income Tax and NICs due by way of 'net settlement' of the employee's award.
- In these circumstances, the employer uses its own cash to settle the Income Tax and employee NICs (and where relevant, employer NICs) that are due to HMRC based on the full value of the securities that are subject to the option of award.
- The company then provides fewer securities to the employee.
- The value of the securities received by each employee is equal to the value after tax (net) that the employee would have enjoyed if they had acquired all the securities and sold some to cover the Income Tax and NICs due under 'sell to cover' arrangements, i.e. net settlement for tax.
- Additionally, some employers let employees exercise options that would otherwise require the payment of a cash exercise price by reducing the number of securities that employees acquire on exercise, i.e. net settlement for exercise price.
Why is identifying awards that are net settled important?
Employers should ensure that they understand which awards held by their employers are net settled to confirm that:
- The payroll withholding and reporting positions are correct.
- Any Corporation Tax relief due has been claimed on the correct basis.
How reporting obligations will change from April 2026
When completing the Non-Tax Advantaged Share Schemes (TASS)(Other) end-of-year return, employers will:
- No longer need to complete two lines of information to report net settlement on the ERS end-of-year return.
- Only complete one row of information per individual employee.
- Continue to retain employer records showing they have accounted for Income Tax and NICs correctly and the method of such recovery from employees.
- These records should be retained for the current tax year plus six years and be produced to HMRC if requested as part of a routine compliance check.
Late end-of-year returns for the 2024-25 tax year or earlier should be submitted using the single line reporting set out in this bulletin.
- Corrected Non-TASS (Other) end-of-year returns for the 2024-25 tax year or earlier may be submitted on the same basis as was originally submitted.
- There will be no changes to the format or structure of the end-of-year return template.
- To support the change in reporting requirements, HMRC will be updating their guidance and ERS manual.
What does this mean in practice?
When completing the Non-TASS (Other) end-of-year return, employers will report net settled awards on one line in answer to the relevant questions in the Non-TASS end-of-year template.
- The 'Other_Options_V4' tab in the template is used where securities are acquired under awards that are options.
- The 'Other_Acquisitions_V4' tab is used for other awards.
- The gross number of securities, i.e. the number of securities the employee would be entitled to before any cashless exercise or any other adjustment, subject to the award, is reported within Q31 of the 'Other_Options_V4' tab.
- When completing Q24 of the 'Other_Acquisitions_V4' tab, it is the gross number of securities that should be reported.
Examples of how net settlement should be reported in the end-of-year return
It is important to note that these examples do not cover every possible scenario.
- Each scenario should be judged on its own merits and looked at on a case-by-case basis.
The following examples show how net settlement should be reported where:
- The gross number of securities the employee would be entitled to is 1,000, before any cashless exercise or any other adjustment.
- The market value of the shares at exercise, or when otherwise acquired, is £20 per share.
For the purpose of these examples, the effective rate of tax and employee NICs for PAYE purposes is 42%.
The questions that the table refers to are from the 'Other_Options_V4' tab of the end-of-year return. These are:
- Q31: The total number of securities the employee is entitled to on exercise of the option before any cashless exercise or other adjustment.
- Q32: If a consideration was given for the securities and the amount given per security in pounds (£).
- Q33: If the securities were acquired, and the market value of a security on the date of acquisition in pounds (£).
- Q38: If the securities were not acquired, was money or value received on the release, assignment, cancellation or lapse of the option? Yes or no.
- Q39: If yes, the amount of money or value received in pounds (£).
| Example number | Action taken | Response to Q31 | Response to Q32 | Response to Q33 | Response to Q38 | Response to Q39 |
| 1 | Net settle for tax liability only: nil exercise price. | 1,000 | 0 | 20 | yes | 8,400 |
| 2 | Net settle for tax liability only: £5 exercise price | 1,000 | 5 | 20 | yes | 6,300 |
| 3 | Net settle for tax liability and net settle for exercise price: £5 exercise price | 1,000 | 5 | 20 | yes | 6,300 |
| 4 | Sell to cover: £5 exercise price | 1,000 | 5 | 20 | leave blank | leave blank |
Example 1
The Income Tax and employee NIC liability is £8,400 and an equivalent cash payment is effectively paid by the employer to HMRC.
- The employer withholds shares to the value of £8,400, and the employee only receives net shares equivalent to £11,600.
- The Income Tax and NICs liability is calculated as £20,000 x 42% = £8,400.
- £8,400 is reportable for Q39.
Example 2
The Income Tax and employee NIC liability is £6,300 and an equivalent cash payment is effectively paid by the employer to HMRC.
- The employer withholds shares to the value of £6,300 and the employee only receives net shares equivalent to £13,700.
- The Income Tax and NICs liability is calulates as follows:
- £20,000 - £5,000 = £15,000
- £15,000 x 42% = £6,300
- £6,300 is reportable for Q39.
Example 3
The Income Tax and employee NIC liability is £6,300 and an equivalent cash payment is effectively paid by the employer to HMRC.
- As part of the net settlement for tax arrangement, the employer withholds shares to the value of £6,300.
- The Income Tax and NICs liability is calculated as follows:
- £20,000 - £5,000 = £15,000
- £15,000 x 42% = £6,300
Additionally, as part of the net settlement for the exercise price arrangement, the employer withholds shares to the value of £5,000 to cover the employee's obligation to pay the exercise price of £5,000 as the employee has exercised their option in full.
- As a result, the employer withholds shares to a total value of £11,300. This is the sum of the total Income Tax and NICs liability plus the exercise price.
- The employee receives net shares equivalent to £8,700.
- For the purpose of completing the 'Other_Options_V4' tab, the value of shares withheld as part of the net settlement for exercise price should not be included in your answer to Q39.
- Only the £6,300 net settled for tax value should be included in your answer to Q39.
Example 4
Where there has been a 'sell to cover', the full entitlement of securities has been beneficially acquired by the employee.
- Q39 should be left blank, and this means you do not need to respond to Q39.
- This is the case even where shares are not physically transferred to employees and are sold by the employer or a broker as an agent on behalf of the employee.
See Employment-Related Securities: Reporting
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