New 2026 ESS Rules: Deferring Tax to Liquidity Events
Overview of the Changes
From 1 April 2026, the Government will introduce new rules for employee share schemes (ESS) under the Taxation (Annual Rates for 2025–26, Compliance Simplification, and Remedial Measures) Bill. Private and unlisted companies can opt into a tax deferral regime, allowing employees to pay tax on shares only at a liquidity event, rather than on grant. Employer tax deductions will align with employee taxing points, simplifying compliance.
Companies should review share-scheme documents, governance, and payroll systems now to prepare for the changes, and communicate with employees about when tax will become payable.
Current ESS Tax Rules and Challenges
Under current rules:
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Employees are taxed when they acquire shares or when employment-related conditions lapse.
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Challenges for private companies:
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Valuation: Determining the taxable value of privately held shares is complex.
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Liquidity: Employees may not have cash to pay the tax when shares vest.
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These issues create barriers to using ESS, particularly for start-ups, where equity is often used to supplement below-market cash salaries while motivating and retaining staff.
How the New Deferral Regime Works
The 2026 changes allow certain shares to be designated as “employee deferred shares”:
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Employees are not taxed at grant, only at a defined liquidity event (e.g., sale, IPO, dividend).
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Employer tax deductions align with employee taxation, reducing administrative burden.
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Companies must notify Inland Revenue and employees when opting in and maintain reporting at liquidity events.
Key clarifications:
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Taxing date occurs when employees gain unconditional rights to shares, but not if there is a genuine risk of forfeiture or protections against share price decline.
Why This Matters
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Employees: Avoid upfront tax on unrealised gains and have cash available to meet tax when payable.
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Employers: Simplifies compliance, removes need for costly valuations, and strengthens ESS as a tool for recruitment and retention.
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Start-ups & growth companies: Particularly benefit from reduced cash pressure while remaining competitive.
Practical Steps for Businesses
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Audit existing ESS agreements and internal controls.
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Decide whether to opt into the deferral regime.
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Update governance documents, payroll systems, and employee communications.
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Ensure employees understand that tax is deferred, not eliminated, and plan accordingly for future liquidity events.
Key Takeaways
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From April 2026, private unlisted companies can defer ESS tax until a liquidity event.
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Employer deductions align with employee taxing points, simplifying compliance.
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Companies should review share schemes, update governance, and communicate changes before April 2026.
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Employees must plan for future tax obligations.
More information to follow
Please visit this page again for updates.
