Tax and SARS knowledge base
When PAYE applies to employee shares and options
When does PAYE apply to shares or options given to an employee?
Last reviewed:
Direct answer
PAYE can apply to gains from employee shares or options, but the timing depends on the type of plan and the event that occurs. Under SARS's current employer guidance, PAYE is deductible from a gain on disposal of a qualifying share or right acquired under a broad-based employee share plan when it is disposed of within five years of grant, subject to stated exceptions. A restricted equity instrument acquired through employment can give rise to an income gain when it vests. For a section 8C vesting gain, the employer must apply for an IRP3(a) tax directive before withholding.
That means the grant date is not always the PAYE date. An exercise, vesting, disposal, lapse, transfer or replacement of an instrument may have different consequences. Do not run a share-plan payment through ordinary salary payroll without first identifying the legal event.
What this means in practice
Employee equity arrangements are not one category. A broad-based employee share plan has its own statutory conditions. SARS says the employer calculates PAYE on a qualifying gain from a disposal within five years of grant in the same way as tax on an annual payment. The guide identifies limited exceptions, including a qualifying exchange, death and insolvency.
Restricted equity is different. SARS's section 8C guidance deals with instruments acquired through employment or office that remain subject to restrictions. A restricted instrument generally vests at the earliest relevant event, such as when restrictions cease or in certain cases immediately before disposal, on termination of an option, or on a relevant lapse. The amount ultimately subject to PAYE depends on the instrument, the event, any consideration paid and the applicable statutory rules.
The company should not rely on a generic payroll setting or a headline valuation. The signed plan rules and grant documents determine whether an instrument is restricted and what rights the employee has. A director can be within the relevant rules as well as an ordinary employee.
Step-by-step
- Gather the plan documents. Obtain the signed plan rules, the individual grant or option agreement, board approvals, the share register and all notices issued to the participant. Identify the employer and any associated company involved.
- Identify the transaction type. Establish whether the arrangement is intended to be a qualifying broad-based employee share plan or whether the employee holds a restricted equity instrument. Do not assume a scheme is broad-based just because several employees participate.
- Identify the taxable event. Record the dates of grant, exercise, vesting, disposal, lapse, cancellation or replacement. For a broad-based plan, consider whether disposal occurs within five years of grant and whether a stated exception applies. For restricted equity, establish the vesting event under the plan and section 8C framework.
- Obtain supporting value information. The payroll file should include the number and class of instruments, consideration paid by the employee, relevant market-value support and sale proceeds if there is a disposal. A valuation may need specialist input.
- Apply for a directive where required. SARS says an employer must submit an IRP3(a) application to establish PAYE to withhold from a section 8C vesting gain. Build enough time into the transaction timetable. A directive is not an optional clean-up after the employee has been paid.
- Process and report accurately. Apply the PAYE treatment to the correct period and use the applicable IRP5 reporting treatment. SARS identifies code 3717 for the relevant broad-based-plan gain and 3718 for a section 8C vesting gain. Confirm that your payroll software is using the current specification before the EMP501 submission.
Documents and records to keep
Keep plan rules, grant notices, option agreements, share certificates or register extracts, participant communications and board resolutions. Retain valuations, exercise notices, sale confirmations, payment records and any SARS directive. Keep the payroll calculation and reconciliation trail that links the event to the employee's IRP5.
These records are especially important where the employee disposes of shares at a different time from the employer's internal plan administration. The payroll team, company secretary and external advisers need a shared, dated record of what happened.
Important limits and exceptions
This article does not calculate a section 8C gain or decide whether an instrument is restricted. It also does not deal with every capital-gains consequence after the employment-income rules have been applied. SARS's guidance contains detailed rules for exchanges, connected-person and non-arm's-length disposals, termination and other events.
The broad-based rule referred to here is specifically about a qualifying plan and a disposal within five years of grant. It is not a general five-year rule for all employee shares. The date of acquisition, plan terms and employee status all matter. If a plan crosses borders or uses a trust, further analysis is likely needed.
When to get tailored advice
Get specialist tax and legal advice before a vesting, exercise or sale where the instrument is restricted, the employee is a director, the company is undertaking a corporate transaction, or the participant is leaving employment. A directive application should be prepared from documents that have been reviewed by the people responsible for the plan.
TaxProof can help organise the plan documentation, event records and payroll reconciliation file. We cannot value the shares, interpret plan rights or substitute for tailored tax advice.