ERS: when you must register and file if you issue shares to employees or directors

📘Overview

This guide explains when a company must register an Employment Related Securities (ERS) arrangement with HMRC and file an annual return, even for one-off share issues that don't form part of an EMI or Unapproved share option scheme. It also covers when an income tax and PAYE/NIC charge can arise.

❓When do you need to register and file an ERS return?

If you give, sell, or otherwise provide shares or other securities to an employee or director by reason of their employment, this is an employment-related securities (ERS) event.

HMRC expects you to register the arrangement and submit an annual ERS return. This applies even if it is a one-off award and even if it’s not part of a tax-advantaged scheme like EMI.

💷 When and why does Income Tax (and PAYE/NIC) apply?

1) Acquisition at undervalue (no or low price)

If an employee/director acquires shares for free or below market value, the discount is normally taxed as employment income.

2) Restricted securities and later “chargeable events”

If the shares carry restrictions (for example, risk of forfeiture, transfer restrictions or leaver provisions), the restricted securities rules can charge income tax:

There may be no initial charge on acquisition where there’s a genuine forfeiture condition within 5 years, but a later charge can arise when restrictions lift/vary or on disposal.
Employees and employers can make a joint “section 431” election to tax the unrestricted market value up-front, preventing later charges when restrictions lift.

3) Readily Convertible Assets (RCA) → PAYE/NIC must be operated

Where the shares are readily convertible assets (for example, there is a market or trading arrangements), any amount chargeable as employment income is subject to PAYE withholding and Class 1 NICs.

📊 Worked example

Scenario: On 1 September 2025 a company issues 10,000 ordinary shares to a new employee for £0.10 per share. The market value per share is £0.25. The shares are not listed, have no trading arrangements, and carry standard leaver restrictions. No s431 election is made.

ERS reporting: The company must register an “Other” ERS arrangement and file the annual ERS return by 6 July 2026.
Income Tax on acquisition: Discount £0.15 × 10,000 = £1,500 is employment income (unless the restricted securities rules displace or modify that initial charge).
Restricted securities: Because there are restrictions, a future charge may arise when restrictions lift or on disposal, unless a s431 election was made to tax the unrestricted value at acquisition.
PAYE/NIC: If the shares become RCAs (for example, a sale or listing is arranged), any employment income amount at that time is subject to PAYE and NICs.

✅ Compliance checklist (employer)

Register an “Other” ERS arrangement for any non tax-advantaged share awards to employees or directors where a reportable event has occurred.
File the ERS annual return for each registered arrangement by 6 July every year, including nil returns, until you close the arrangement with HMRC.
Assess Income Tax implications at acquisition and on later chargeable events for restricted securities, and consider a joint s431 election where appropriate.
Determine if the shares are RCAs and, if so, operate PAYE and NICs.
Keep records, templates and submission receipts; late filing triggers penalties.