UK
Section 431 Election: What It Is and Why It Matters
A UK Section 431 election is a joint filing by employee and employer within 14 days of share acquisition. It treats shares as acquired at full unrestricted market value, so future gains are taxed as capital gains (10–20%) instead of income (up to 45%), reducing tax exposure.
TL;DR Summary
- A Section 431 election allows UK employees to pay tax upfront on the full value of restricted shares they receive from their employer.
- It ensures future gains are taxed as capital gains, not ordinary income — reducing potential tax rates from up to 45% to 24%.
- Must be signed by both employee and employer within 14 days of share acquisition.
- It’s not filed with HMRC, but must be retained for compliance and reported in the ERS return.
What Is a Section 431 Election?
A Section 431 Election allows UK employees to pay income tax upfront on the unrestricted market value (UMV) of shares they receive, even if those shares are subject to restrictions such as forfeiture or limitations on sale.
By making this election:
- Employees can avoid additional tax charges in the future if the value of the shares increases once those restrictions are lifted.
- Main Benefit: Future share growth is taxed as capital gains (10–20%) instead of ordinary income (up to 45%), reducing potential tax liabilities for employees and employers alike.
To put this into action, a Section 431 election (also known as an S431 election) is a joint tax election signed by both the employer and employee within 14 days of share acquisition.
Why Does a Section 431 Election Matter?
When employees acquire shares through employment, those shares are often restricted and therefore their immediate value is lower. A Section 431 election allows the employee and employer to agree to treat those shares as if they were acquired at their full unrestricted value from day one, paying any necessary tax upfront and locking in capital gains treatment for future growth.
Without a Section 431 election:
- Part of any future share growth may be taxed as high-rate income.
- The company could face unexpected PAYE and NIC liabilities at exit events.
- Employees lose the benefit of favorable capital gains tax rates.
In short: Failing to make a Section 431 election can cost both employees and companies significantly more in taxes later.
How to Make a Section 431 Election
To execute a valid Section 431 election, both the employee and employer need to follow a few key steps. The most important being that the election be signed jointly within 14 days of the acquisition of shares, as there are no extensions and no exceptions.
While the election isn’t filed with HMRC, it must be securely retained by the company. Electronic signatures are allowed, and storing the signed election alongside your broader share plan documentation ensures you’re prepared for audits, due diligence, or any HMRC inquiries.
Slice Global Tip: Automate election signing at the same time as share issuance paperwork to prevent missed deadlines.Making a Section 431 election isn’t necessarily complicated but it does require precision and timing. The good news? When you have the right processes in place, you can execute it quickly and confidently.
Below is a step-by-step guide to ensure nothing slips through the cracks:
- Prepare a Valid Template. Use an HMRC-compliant Section 431 election form.
- Joint Signatures. Ensure both employee and company sign the election.
- Record the Date. Sign within the strict 14-day limit after share acquisition.
- Store the Election. Keep the signed document securely for at least the life of the shares.
- Annual Reporting. Reflect the election appropriately in your ERS annual filing to HMRC.
Common Mistakes with Section 431 Elections (and How to Avoid Them)
Most issues with Section 431 elections come down to timing, communication, or documentation, meaning they’re almost always preventable. The most common pitfall? Missing the 14-day deadline, which is why it’s recommended that the election be signed at the same time shares are issued. Another common challenge is employee hesitation; many simply don’t understand the tax benefits of signing, so a quick, clear explanation can go a long way.
Remember, we may understand why the S431 election is an incredible opportunity, but if it’s not communicated early to your employees, you may have to explain why it wasn’t later. Lastly, In fast-moving start-up environments, it’s easy for paperwork to slip through the cracks especially when processes aren’t centralized. That’s why storing signed elections in a secure, backed-up system should be heavily considered.
Section 431 vs Section 83(b) Election
If you’re familiar with equity compensation in the US, you might recognize some parallels between the UK’s Section 431 election and the U.S. Section 83(b) election. Both serve a similar purpose: locking in capital gains treatment by taxing the value of shares upfront. But the finer details like deadlines, filing methods, and who needs to sign are different enough to trip people up, especially in cross-border plans with global participation. Here’s how the two elections compare side by side.
Summary: Both elections aim to protect future growth from being taxed as income, but the UK requires faster and mutual action.
When Should You Make a Section 431 Election?
To help you better educate employees on when a Section 431 election makes sense, we’ve included a quick-reference table below. It outlines common scenarios, the recommended action in each case, and why it matters. Feel free to share this resource directly with your employees!
Pro Tip from the Slice Global team: It’s safer to sign a Section 431 election even if you think it's unnecessary than to miss one when it's required.
In today's competitive tech landscape, attracting and retaining top talent across borders is crucial for startup success. For companies with a growing presence in Sweden, navigating the complexities of equity compensation can be a significant hurdle. This is where Qualified Employee Stock Options (QESOs) become critical. Although implementing QESOs involves navigating numerous requirements, the substantial tax advantages make them a highly rewarding solution for both companies and employees.
What are QESOs?
Qualified Employee Stock Options (QESOs) are a type of stock option specifically designed for companies with a Swedish presence to incentivize employees with equity in the company. The beauty of QESOs lies in their favorable tax treatment for both the company and the employee:
- Employee Benefits: Employees enjoy tax-free grants and are only taxed on capital gains at upon sale, typically at a rate of 25%.
- Company Benefits: Companies benefit from reduced social security contributions compared to traditional non-qualified stock options.
Difference Between QESOs and Non-Qualified Stock Options in Sweden
When considering stock options, it's essential to understand the differences between QESOs and non-qualified stock options in Sweden:
- Tax Event: For non-qualified stock options, there is a tax event upon exercise. Employees are taxed at progresive tax rate ranging between 30%-55% on the difference between the market price and the exercise price at the time of exercise.
- Withholding Obligation: Employers have a withholding obligation for non-qualified stock options. Employers must withhold the appropriate tax amount through salary in the month following the exercise.
- Social Security Contributions: Non-qualified stock options include a social security contribution obligation at a rate of 31.42%.
Key Requirements for QESOs
To benefit from the generous tax rules associated with QESOs, several strict requirements must be met. Here are the ten essential criteria for companies, stock options, and option holders:
Qualifying Conditions for Companies
- Fewer than 150 employees.
- No more than SEK 280 million in net Sales or balance sheet total.
- The company’s operations must not be older than 10 years.
- The company must not primarily engage in asset management, banking, financing, insurance, coal or steel production, real estate trading, long-term rental, or services related to legal advice, accounting, or auditing (“excluded activities”) for 3 consecutive years before the grant.
- Company must not be traded on a public stock market.
- Company cannot be direcly or indirectly controlled by a governmental body.
- The company must not be in financial difficulties.
- Company cannot be purely a holding company, and must undertake trade operations
Qualifying Conditions for Employees
- Be an employee or board member of the granting company or any subsidiary.
- Work a minimum of 75% of their working hours for the granting company or any subsidiary.
- Must earn a minimum salary of 13 “income base amounts” during the vesting period of 3 years after the grant date. The income base amount in 2024 is SEK 76,200.
- Employee, together with closely related affiliates, cannot own more than 5% of the voting rights or share capital of the granting company.
Beyond QESOs: Comparative Analysis
If you're familiar with the UK's Enterprise Management Incentive (EMI) scheme, you'll find striking similarities between QESOs and EMIs. Both programs have similar conditions and are designed to optimize tax benefits and encourage employee ownership, making them highly attractive for startups and growing companies looking to incentivize their workforce.
However, there are key distinctions that set QESOs apart, providing unique advantages:
- No Limit on Exercise Price: One of the most notable advantages of QESOs over EMIs is the absence of a cap on the exercise price. This means that employees can potentially benefit more from their options, as there are no restrictions on the price at which options can be exercised. This flexibility allows for greater potential for value creation, particularly in rapidly growing companies where share prices can increase significantly over time.
- Enhanced Flexibility and Applicability: The absence of exercise price restrictions allows for more customized compensation packages, appealing to a broader range of businesses and making QESOs a more versatile option across various sectors and stages of development.
Slice's Approach to QESO Management
At Slice, we offer a comprehensive solution for managing QESOs for Swedish employees, ensuring a streamlined and efficient process from creation through sale. Here's how we can assist:
- Value Alerts: We provide real-time alerts on the value of options upon grant, both for the company and the option holder. This ensures the company does not exceed the option value limitations.
- Exercise Period Management: Our platform tracks and manages exercise periods, ensuring timely notifications and helping option holders maximize their benefits within the allowed timeframe.
- Scope of Work Conditions: We monitor and enforce the scope of work conditions, ensuring compliance with employment and work hour requirements for QESO This helps maintain eligibility for tax benefits and other advantages.
- Relationship Management: Whether the option holder is an employee, board member, or has another type of relationship with the company, we ensure all relevant criteria and conditions are met and tracked accurately.
With Slice, managing QESOs becomes a seamless experience, allowing both companies and option holders to focus on growth and success.
Conclusion – Investing the Time to Grant QESOs in Sweden is Worth It!
Although granting QESOs in Sweden requires understanding the tax rules, company requirements, and employee conditions, the tax advantages it offers are significant. Investing time in implementing and managing QESOs is a worthwhile endeavor, enhancing employee compensation and driving growth.
Yarin Yom-Tov is a Product Tax Manager at Slice, where he helps shape global equity solutions with a strong focus on international taxation and strategic tax planning. Prior to Slice, he was an associate at a leading law firm and a top-tier tax boutique, advising on international tax structuring, cross-border transactions, mergers, and acquisitions. Yarin holds an LLB in Law and a BA in Economics from The Hebrew University of Jerusalem.
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