Timing is everything – proposed changes to the timing of taxation for employee share schemes

By Mila Robertson & Ian Fay

For employees in unlisted companies, being provided with shares in their employer can be like being handed a gift that they can’t unwrap yet, but must pay tax on now.

It’s been a longstanding issue – how can unlisted companies remunerate employees in shares, when their employees have no ability to sell the shares to pay the tax due on the value of the benefit (being the difference between market value and the amount paid by the employee). Currently the rule is that when shares are provided to the employee with no material conditions, they are taxable to the employee and the employee must pay tax on the shares (how the shares are valued is another complication). If the company is an unlisted company, this often means that employees have no ability to sell a portion of the shares to cover this tax and must make other arrangements to meet their obligations.  

While many companies have found ways around this, often by utilising option or restricted share unit (RSU) schemes that become exercisable or vest immediately prior to a liquidity event, it means that employees usually can’t have actual share ownership until this future liquidity event.

This led to concerns that employers were missing out on the benefit of employees being shareholders, i.e. alignment in goals between the company and the employee, including profitability or growth. Having a right to something in the future doesn’t have the same intrinsic feeling of ownership when shares are held directly by an employee.

To assist with this, earlier in 2025, Inland Revenue released for consultation a proposal that these rules should be relaxed for startup entities. While this was a great start, a number of submitters on the consultation, including Deloitte, recommended that the proposed changes should be widened to apply to all unlisted companies given they often face the same liquidity constraints. This approach would also have the benefit of avoiding boundary issues such as defining when something was a “startup”.

The Government took these submissions onboard and the August Bill has introduced the concept of Employee Deferred Shares (EDS). If implemented, it will mean that shares can be provided to employees, with the taxing point deferred until a liquidity event occurs. This will also defer the deduction to the employer, so that symmetry in the treatment is achieved.

A liquidity event would be considered to be the:

• listing of the company;
• sale or cancellation of the shares; or
• payment of a dividend in respect of the shares.

Under the changes in the Bill, the employer will have the power of choosing that the shares should be considered EDS, and will be required to notify both the Inland Revenue and the employee that it is an EDS at the time the shares are provided to the employee.

If passed as proposed, these new rules would apply from 1 April 2026.

The trade off

The benefit of the EDS proposal is the deferral of the payment of the tax due by an employee to a future date (when the shares become liquid). The flipside however is that any increase in the share price, from the time the employees are provided with the shares and when they subsequently become liquid, will be taxable.

Employers will need to consider carefully if it is more valuable for their employees to receive the shares and pay tax at an earlier date, or if it is better for the taxing point of the shares to be deferred until a liquidity event, where employees should have cash available to pay the tax.

A risk with the employee paying tax when they receive the shares is that ultimately, they may realise less value on the liquidity event than they pay in tax when receiving the shares. This will be something that needs to be weighed up based on the company’s circumstances and their employees’ appetite to take this risk (if the company does not fund the employees’ tax). Another consideration for employers will be any potential impact of their deduction for the issue/provision of the shares being deferred.  For example, if the employer is in a tax loss position, a deduction may be of limited immediate value - unless they can benefit from the losses in some way (e.g. under the R&D Tax Loss Credit regime).

Please get in touch with your usual Deloitte advisor if you would like to understand how these proposed changes may be able to benefit your business and employees.