Relevant Tax on Share Options: A complete guide for Irish regulations

If you are living and working in Ireland, you may receive company shares from your employer. Whether you receive these shares as part of your remuneration package, as a bonus, or as a once-off reward, you must file an income tax return.

Tax liability varies depending on how the shares are awarded to you – in some cases, you as the employee are obliged to pay tax (RTSO) on this income; in other cases, your employer is liable to pay it.

We know that filing a tax return can be a bit daunting, particularly for first-time shareholders, which is why we wanted to share the answers to a few common questions asked by our clients who receive employment-related share options.

What is the Difference between Shares and Dividends?

While this may seem like a simple distinction, it is also an essential one.

Shares are, in essence, pieces of a company that represent a percentage of the company as a whole. If you own one or more shares in a company, you are referred to as a shareholder.

Dividends are portions of a company’s income that are paid to shareholders. The dividends you receive as a shareholder depend on the number of shares you own, the company’s earnings and the dividend type.

Irish Resident companies pay Dividend Withholding Tax (DWT) – currently levied at 25% – before it is distributed to you as a shareholder. However, any dividends received must still be declared to the Revenue Commissioners in your income tax return.

What are Share Options?

Many of our clients are unsure of the difference between being granted shares and being granted share options. This causes a great deal of confusion when it comes time to file their taxes.

If your employer grants you a share option, they are offering you the right to acquire shares in the company at a pre-determined price. Often, you will be given a period of time after which you must decide whether to exercise that option. Income Tax, USC and PRSI will be levied on any profits you make from share options.

What is RTSO?

Relevant Tax on Share Options (RTSO) is an income tax charge levied on employees who receive or exercise share options granted by their employers under unapproved share option schemes. These schemes allow employees to purchase shares in the company at a discounted price, potentially realizing a significant gain upon exercise.

When you exercise a share option, you must pay the Relevant Tax on Share Options (RTSO) within 30 days by submitting a RTSO1 Form to the Revenue Commissioners along with the payment. You may also be subject to Capital Gains Tax if you do not sell the shares immediately.

Types of Share Options in Ireland

Employment-related shares options are split into two categories: Approved Share Schemes and Unapproved Share Schemes. 

What are Approved Shares Schemes?

Approved Share Schemes are programmes sanctioned by the Revenue Commissioners through which employers can grant share schemes to employees.

There are two types of Approved Share Schemes: Approved Profit-Sharing Schemes (APSS) and Save As You Earn (SAYE) Schemes.

APSS: Approved Profit-Sharing Schemes allow employers to award employees up to a maximum of €12,700 in tax-free shares per year. In order for this income to be exempt from Income Tax, the shares must be held in a trust for a period of retention set by the employer.

SAYE: Save As You Earn schemes offer employees the option to buy shares at a discounted rate using savings that the employee has accumulated over a set period of time. If the employee exercises the option to purchase shares at the end of this savings period, you will not be liable to pay Income Tax; however, you must still pay Universal Social Charge and Pay Related Social Insurance.

What are Unapproved Share Schemes?

Any method of providing employees with shares or share options that does not fall under APSS or SAYE is referred to as an Unapproved Shares Scheme. You may be required to pay Income Tax (IT), Universal Social Charge (USC) and Pay Related Social Insurance (PRSI) on the market value of shares received under unapproved schemes.

Two of the more common unapproved schemes are Restricted Stock Units (RSUs) and Employee Share Purchase Plans (ESPPs).

RSUs: A Restricted Stock Unit is a grant of shares in the company to you by your employer on the completion of a vesting period – an agreed period of time set by the company before you own the shares. Following the vesting period, you will receive either the company shares or their cash equivalent.

You are liable to pay IT, USC and PRSI, the payment of which is processed via the PAYE system by your employer. You may also be liable to pay Capital Gains Tax (CGT), should you decide to sell your RSU – in this case, you must declare the income to the Revenue Commissioners and pay the CGT yourself.

ESPPs: An Employee Share Purchase Plan allows employees to purchase discounted shares in the company through payroll deductions. If you enrol in an ESPP, your employer withholds an agreed-upon percentage of your salary each month for a period of time and then purchases company shares on your behalf at the end of that period using the withheld wages.

You are liable to pay tax on the discount, meaning the difference between the market value of the shares and the amount you actually paid for them. The deduction of IT, USC and PRSI is processed via the PAYE system by your employer.

Top Tips For Filing Relevant Tax on Share Options (RTSO)

• Understand your RTSO obligations: Before you start filing RTSO returns, it’s essential to fully grasp your obligations under the Relevant Tax on Share Options (RTSO) rules. Familiarize yourself with the conditions of your share option scheme and the applicable RTSO rates. 
• Calculate RTSO liability: Apply the current RTSO rate of 52% tax on the initial value of your employee share options when exercised. Also, if there is an increase in this value (profit) at the point of sale, you must pay 33% CGT on the value of the profit. 
• Gather all relevant documentation: Gather all necessary documentation related to your share options, including grant letters, exercise notices, and any supporting statements or calculations. Ensure the information is accurate and complete to avoid any delays or errors in your RTSO filing.
• File your RTSO returns on time: RTSO returns must be filed within 30 days of the exercise or other relevant event. Late filing can result in penalties and interest charges, so it’s crucial to meet the deadlines.
• Seek Professional Assistance: Consider seeking professional tax advice from a qualified accountant or tax advisor for guidance on RTSO compliance to ensure accurate filing and maximise tax deductions.
• Stay Informed of Tax Changes: Keep abreast of any changes in tax regulations or legislation or annual budget updates that may affect your RTSO obligations.
• Maintain accurate records: Keep detailed records of all share option transactions, including exercise dates, share prices, and RTSO payments. Retain these records for at least six years for tax purposes.

Changes to the declaration of share benefits effective 01/01/2024. 

Finance Bill 2023 announced that effective 01 January 2024, the taxation of benefits realised on the exercise, purchases, assignment or release of a right to purchase shares and other assets will no longer be subject to self-assessment but taxed through the PAYE system.

This change is welcomed by many PAYE employees who have struggled to understand the regulation and payment of income tax, PRSI and USC under the Relevant Tax on Share Options (RTSO) system. This also made employees subject to self-assessment and required the filing of a Form 11.

However, there are a number of important items an employee who has availed of share purchase must be aware of :

1. If the employee does exercise (purchase) shares and holds the shares for a period of time before selling the shares, there are tax implications.  If the employee sells these shares at a price over and above the purchase price then this gain is liable to Capital Gains Tax (CGT) in Ireland at a rate of 33%.
2. Up to 31/12/2023, the employee must still provide an RTSO1 document to Revenue and file a Form 11 income tax return when they exercise shares before this date.
3. As in previous years, going forward if the employee receives dividends on the shares this must be declared.  Although some dividend withholding tax may have been paid in another jurisdiction the taxpayer is still obliged to declare the dividends in Ireland.

Ensure Accurate and Timely RTSO Filing with Tax Returns Plus

It is important to remember that regardless of the way in which your employer grants you shares or options, you must still file an income tax return. The amount and type of tax you will pay, however, will vary depending on your circumstances.  See our webpage on employment-related shares for more detail.

If you are still unsure as to your tax liability, get a quick quote to find out how the experts at Tax Return Plus can help you with your tax return. If you require any further detail in relation to all aspects of employee shares please do no hesitate to contact the Tax Return Plus team.

If you found this guide helpful, make sure you check out some of our other helpful guides.

**Note: As of 01/01/2024, although all taxes on the purchases/exercise of employee shares benefits will be processed via payroll, it still remains the employees responsibility to calculate, file and pay any Capital Gains Tax (CGT) on the sale of these employee shares.**