Income tax and national insurance on overvalued shares

When a company buys back shares, particularly minority holdings, the valuation process is crucial. These shares are often subject to a discount due to their lack of control or influence, meaning they may be worth less than a proportional share of the company.

However, if a company overpays for the shares, exceeding their true market value, this excess amount could create unintended tax consequences. The overpayment may be treated not as a capital transaction but as taxable income, leading to additional liabilities for both the company and the seller.

PAYE and National Insurance Consequences

Overpayments in share buybacks can have serious tax consequences:

  • PAYE (Pay As You Earn): If the excess payment is deemed to be a benefit or disguised remuneration, HMRC may classify it as taxable income, meaning the company must deduct PAYE.
  • National Insurance Contributions (NIC): Depending on the structure of the transaction, both employer and employee NICs may become due, increasing the overall tax burden.
  • Potential HMRC Scrutiny: If HMRC determines that a company has intentionally inflated the buyback price to provide a disguised bonus or benefit, it may impose penalties.

Given these risks, it’s critical to ensure that all share buybacks are carried out at a fair and justifiable market value.

Avoiding Tax Pitfalls in Share Buybacks

To minimise risks, businesses should take the following steps:

  1. Obtain a professional share valuation – A robust and independent valuation can prevent HMRC challenges.
  2. Consider alternative exit strategies – If a buyback is not tax-efficient, other options may be available.
  3. Consult tax and legal experts – Proper structuring and documentation can protect both the company and the shareholders from unexpected liabilities.

How We Can Help

At Lewis Brownlee, we specialise in helping businesses navigate income tax on overvalued shares. Our experts provide guidance on:

  • Fair share valuations to prevent overpayment.
  • Tax-efficient structuring of share buybacks.
  • Ensuring PAYE and NIC compliance to avoid HMRC penalties.

If you’re considering a share buyback, we can help you structure it correctly to avoid unnecessary tax liabilities. Contact us today via our contact page for expert advice.

By ensuring compliance with HMRC regulations, you can protect your business and shareholders from unexpected tax consequences.