Income Tax (Earnings and Pensions) Act 2003 section 526

Charge where option granted at a discount

Section 526 deals with the income tax charge that arises when a share option is granted to an employee at a price below the market value of the underlying shares.

• If the total of any consideration paid for the grant of a share option plus the exercise price for the maximum number of shares is less than the market value of those shares at the date of grant, a discount exists and a tax charge arises
• The amount of the discount counts as employment income of the individual in the tax year the option is granted
• This charge can only arise in practice where there has been an agreement to fix the share value earlier than the actual grant date, or where a valuation error has been made
• Section 480(4) provides relief by allowing a deduction for amounts already taxed under this section, so the individual is not taxed twice on the same economic gain when the option is later exercised