What is the automatic exemption under section 425 of the Income Tax (Earnings and Pensions) Act 2003?

Section 425 provides that when an employee acquires restricted securities subject to transfer, reversion or forfeiture provisions that will lift within five years, no income tax charge arises on the acquisition itself. The exemption applies automatically and shelters the acquisition value from an immediate tax charge, though a charge may arise later when the restriction is lifted.

Can the section 425 exemption be disapplied by the employer and employee?

Yes, the employer and employee may jointly and irrevocably elect to disapply the section 425 exemption. The election must be made using an HMRC-approved form and submitted within 14 days of acquisition. This may be advantageous where the securities are expected to increase substantially in value after the restrictions lift, allowing tax on a lower acquisition value.

Does the section 425 exemption override all income tax charges on acquisition of restricted securities?

No, the automatic exemption does not override charges arising under separate rules for acquisitions by conversion of other securities, acquisitions at less than market value, or acquisitions under securities options. These charges operate independently of the section 425 exemption and may still apply even where the exemption shelters the basic acquisition charge.

Who is eligible to make the joint election under section 425?

The joint election is only available where the employment earnings at the time of acquisition are, or would be, general earnings chargeable under the main United Kingdom employment income charging provisions. In practice, this means UK-based employments generally qualify, but certain overseas employments falling outside those charging provisions may not be eligible.

Income Tax (Earnings and Pensions) Act 2003 section 425

No charge in respect of acquisition in certain cases

Section 425 provides an automatic exemption from income tax on the acquisition of certain restricted securities, whilst allowing employers and employees to jointly opt out of that exemption.

Where securities are restricted because they are subject to transfer, reversion or forfeiture at acquisition, and that restriction will lift within 5 years, no income tax charge arises on the acquisition itself
This automatic exemption does not override charges that may arise under separate rules for acquisitions by conversion, acquisitions at below market value, or acquisitions under securities options
The employer and employee may jointly and irrevocably elect to disapply the exemption, using an HMRC-approved form submitted within 14 days of the acquisition
The election is only available where the employment earnings at the time of acquisition are, or would be, general earnings chargeable under the main UK employment income charging provisions

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