Nil or partly paid shares

Nil or partly paid shares

Nil or partly paid shares can be an attractive way to motivate staff where tax-advantaged share option schemes are not available or where the cost of purchasing the shares is too expensive for the employee. Private companies will often find such share plans particularly attractive.

How it works

Under a nil or partly paid share arrangement, a company issues shares to an employee at the current market value of the shares payable on deferred terms. No income tax or National Insurance Contributions arise on acquisition of the shares with the obligation to pay all (for nil paid shares) or part (for partly paid shares) of the purchase price left outstanding until a future date, for example on a sale or listing of the company.

The shares can be subject to restrictions on transfer, or forfeiture if the employee ceases employment. Participants often forfeit the shares if they leave before an exit as a ‘bad leaver’. This typically takes the form of a requirement to sell the shares back at the acquisition price (or market value if lower) with the proceeds being used to pay the outstanding subscription price due in relation to the shares so the participant takes no upside.


The employee is treated as paying market value with the unpaid subscription monies treated as a notional loan. An annual income tax charge (and employer’s NIC charge) potentially arises on the notional interest on the outstanding subscription price. The notional interest benefit is reported on the individual’s P11D for each relevant tax year and the income tax is payable through the individual’s self - assessment income tax return. Class 1A National Insurance will also be payable by the company.

However, if the company is ‘close’ for tax purposes, the employee may be exempt from the taxable benefit of the notional ‘interest free’ loan. Broadly, a company is close where it is under the control of five or fewer shareholders or any number of shareholders who are also directors of the company: the vast majority of typical family or owner-managed companies will be ‘close’ companies for tax purposes.

If the partly paid or nil paid shares are issued by a close trading company, provided that the participants work for the greater part of their time in the actual management or conduct of the company, tax relief would be available that would mean that the annual interest benefit would negate the benefit of the interest free loan. Care needs to be taken to determine whether the participants qualify for this relief.

The growth in share value from acquisition is subject to capital gains tax - more attractive than the income tax treatment that applies to a cash bonus arrangement or non-tax advantaged share options. This offers a significant benefit to employees of high growth companies.

Benefits of nil/partly paid shares

As with all employee share plans, because the participant becomes a shareholder, their interests are aligned with existing shareholders from the date of purchase. In addition:

  • No immediate participant funding is required.
  • Nil or partly paid shares require participants’ commitment to pay full value for the shares but allow them to pay for the shares on an exit when they have the funds to pay.
  • The growth in share value is subject to capital gains tax rules, which is more attractive to employees than income tax treatment that applies to salary and benefits.
  • Nil or partly paid shares form part of the share capital of the company and are therefore governed by the company’s Articles of Association and subject to the same provisions as other shares on the sale of the company including tag and drag provisions. The shares can potentially have dividend / voting rights giving the ‘additional’ benefits of a real shareholding.


If the unpaid subscription price payable for the shares is waived by the company (for example if the share value falls) or if the shares are sold prior to the unpaid monies being paid up, there will be an income tax and NIC charge at that time on the amount of the consideration waived or deemed to be waived.

There is no corporation tax relief for the company on the growth in value of the shares.

There is a potential benefit in kind on the notional interest for the employee (see above).


  • A participant acquires 30,000 ordinary shares at an agreed purchase price of £1 per share (equal to the market value at the time).
  • The purchase price is not payable until a time when the company calls for payment for example on a sale of the shares.
  • As the company is not close for tax purposes, the employee is subject to income tax on the interest free element of the notional loan from acquisition to sale. This annual benefit in kind charge would be based on HMRC’s official rate of interest that is currently 2.25% (the rate for 2023/24). Assuming the participant is a higher rate tax payer the annual benefit in kind charge is £303.75, i.e. (£30,000 x 2.25%) = £675 x 45%= £303.75.
  • Three years later the shares are sold for a price of £6 per share.
  • At this time, the company calls for the purchase price (equal to £30,000).
  • The participant will sell his shares for £180,000 and realise a gain of £150,000 which will be subject to capital gains tax at 20%.
  • Capital gains tax will equate to £28,800 (after taking into account the £6,000 capital gains annual exemption for 2023/24)
  • No PAYE or NIC (employee’s or employer’s) will be payable.
  • The participant’s net proceeds after tax will be £121,200.
  • No corporation tax relief will be available for the employing company.

​How we can help

BDO LLP can advise on all aspects of the design and implementation of nil or partly paid shares. Our advice includes drafting and producing the relevant documentation, input on performance measures, exit planning, tax considerations, accounting, share valuation, communication and ongoing reporting obligations.

For help and advice on creating tax-efficient share plans to help your business grow, please contact Andy Goodman or Matthew Emms.

Read more on Share plans and incentives