Disguised remuneration is a topic that often surfaces when companies introduce or update their share-based reward structures. Many organisations encounter it not because they are pursuing aggressive tax planning, but because the rules are broad and can be triggered without realising.
Understanding how these rules work and how they apply to equity arrangements helps companies design and implement effective incentives while staying compliant.
Disguised remuneration is a term used by HMRC to describe arrangements that provide employees or directors with rewards, loans or other benefits in a way that seeks to avoid income tax and national insurance.
The focus is on substance over form. If an individual receives value because of their work, HMRC expects it to be taxed as employment income, regardless of how it is structured.
HMRC considers an arrangement to be disguised remuneration if:
An employee or director receives value in connection with their employment.
The value is delivered through an arrangement that seeks to avoid PAYE and national insurance.
The structure attempts to convert earnings into something taxed more lightly or not taxed at all.
The rules sit mainly within Part 7A ITEPA 2003 and are intentionally broad. HMRC’s own guidance emphasises that the rules intend to stop rewards being routed through third parties or artificial structures to avoid income tax.
Many of the original cases that led to the rules involved non-equity arrangements. Common examples include:
Where value is provided to an employee by someone other than the employer, such as:
These were often used to provide benefits that looked like loans or capital rather than earnings.
A classic hallmark of disguised remuneration is a loan that is unlikely to ever be repaid, for example:
The loan charge legislation was introduced specifically to address this type of arrangement.
Even when structured creatively, if payments are guaranteed, low risk or linked directly to performance or service, HMRC generally treats them as employment income.
Share schemes are a common trigger point because some companies unwittingly implement them without fully understanding of how the tax rules apply. Below are some common scenarios where disguised remuneration risk can arise.
If individuals acquire shares at a discount to their true unrestricted market value (UMV), the discount is treated as earnings.
If the company claims that shares are worth very little when commercial reality suggests otherwise, HMRC may see this as disguised remuneration.
This can also happen when a company uses nominal valuations to avoid tax at the point of purchase.
Growth share classes can be tax-efficient when designed correctly, but they must be commercially grounded and properly valued.
If hurdle rates are set so high or so low that they do not reflect genuine economic risk, HMRC may argue that the structure primarily exists to reduce employment tax.
Restrictions that exist solely to reduce the taxable value of an award can attract scrutiny.
HMRC expects restrictions to be commercially meaningful. If a restriction is added purely for tax benefit, the arrangement risks being treated as disguised remuneration.
If a share plan behaves in substance like a cash bonus, for example, with guaranteed buybacks, guaranteed exit payments or short-term vesting with minimal risk, HMRC may reclassify the value as earnings.
Companies must demonstrate that shares confer genuine equity risk and upside.
Some legacy or complex structures route shares or loan arrangements through trusts or third parties.
HMRC views these as high risk. Even if not intentionally avoidance-driven, they can fall within the disguised remuneration rules.
Disguised remuneration comes with substantial financial and reputational consequences. Understanding these risks helps businesses avoid costly mistakes.
If HMRC decides an arrangement is disguised remuneration, it can levy income tax, national insurance and employer national insurance on the full value transferred. This can also apply retrospectively and may include interest and penalties.
In many cases, the employer is responsible for operating PAYE. If HMRC concludes that PAYE should have been applied, the company can be required to settle all amounts. This includes the employee income tax that should have been withheld.
If HMRC considers that the company failed to take reasonable care, penalties can be applied. Larger companies are expected to have governance processes in place, including independent valuations and appropriate documentation.
Unresolved equity and tax issues can create problems during investment rounds, due diligence or acquisitions.
Buyers and investors often ask for confirmation that no disguised remuneration risks exist. Any uncertainties can delay deals or reduce valuation.
Tax governance is a key part of corporate responsibility. Issues related to disguised remuneration can undermine trust with investors, regulators and employees.
Some signs that a share scheme or equity arrangement may be drifting toward disguised remuneration include:
The “little true equity risk” element means:
The payment is structured in a way that the employee effectively has full use and enjoyment of the funds or assets.
The "loans" often have terms that mean they are never expected to be repaid, are interest-free, or are repaid in a way that is highly artificial.
Unlike genuine investments subject to market fluctuations, the individual receives a predictable value with minimal actual risk of loss, effectively a form of guaranteed income.
Companies do not need to be intentionally avoiding tax to end up caught by these rules. Honest misunderstandings or poorly designed schemes are often the root cause.
The good news is that disguised remuneration risks are manageable with good governance and proper structuring.
A defensible valuation is one of the strongest protections. It should follow a recognised methodology, address unrestricted market value and reflect commercial reality.
Share classes and hurdles should be driven by strategic goals, not tax aims. Documenting the commercial rationale helps evidence compliance.
Approved schemes such as Enterprise Management Incentives (EMIs) provide a clear statutory framework. Even non-tax advantaged schemes can be low risk when structured in line with the employment-related securities rules.
Older arrangements, especially those involving trusts or loans, may need modernisation. A regular review reduces long-term risk.
Individuals benefiting from equity awards should understand the tax treatment. Transparent communication reduces misunderstanding and future disputes.
Disguised remuneration is not always the result of deliberate tax avoidance. It is often the unintended outcome of complex or rushed reward structures.
For companies offering equity-based incentives, particularly growing or larger organisations, it is essential to ensure that share schemes reflect their true commercial intent.
With proper design, robust valuation and clear documentation, companies can reward teams effectively while remaining compliant and avoiding HMRC challenge.
See how Vestd makes running a compliant share scheme much simpler. Book a free demo today.
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