Income Tax (Earnings and Pensions) Act 2003 section 511

PAYE deductions to be made by trustees on shares ceasing to be subject to plan

Section 511 deals with situations where plan trustees, rather than the employer company, must account for PAYE when shares leave a Schedule 2 Share Incentive Plan and give rise to taxable employment income.

• When shares cease to be subject to a Schedule 2 SIP and this creates taxable employment income for the participant, the section applies if either HMRC considers it impracticable for the employer company to make the PAYE deduction (Condition A) or there is no qualifying employer company at all (Condition B).
• Where this section applies, the normal mechanism under section 510(2) — whereby the employer company handles the PAYE — is switched off, and instead the plan trustees must make the PAYE deduction themselves, treating the participant as though they were a former employee of the trustees.
• The amount on which the trustees must operate PAYE — called the "taxable equivalent" — is equal to the amount that counts as employment income of the participant under the SIP code when the shares leave the plan. In practice, this means the trustees deduct income tax at the basic rate.
• Where this section is in effect, the separate rule in section 689 dealing with employees of non-UK employers does not apply, so there is no overlap or duplication of PAYE obligations.