S431 Tax Election: 14-Day Deadline, Contents, and When to Sign

A Section 431 election is a joint agreement between you and your employer, made under Part 7, Chapter 2 of the Income Tax (Earnings and Pensions) Act 2003, to pay income tax on the full unrestricted value of restricted employment shares at the moment you acquire them rather than as restrictions later fall away. You have 14 days from acquisition to sign it. Done properly, it converts future share price growth from employment income taxed at up to 45% into a capital gain taxed at 18% or 24%.¹²

The Problem the Election Solves

Shares acquired through employment are “restricted securities” when a contract, agreement, or condition reduces their market value. Under Section 423 of ITEPA 2003, three categories of restriction qualify: forfeiture provisions that can claw shares back if conditions aren’t met, restrictions on selling or disposing of the shares, and provisions where holding or exercising rights attached to the shares could disadvantage you.³ Leaver clauses and multi-year lock-ups are the usual examples.

These restrictions depress the shares’ current value. HMRC values them at acquisition using the Actual Market Value (AMV), which reflects the discount. If you make no election, each time a restriction is later lifted, varied, or you dispose of the shares while still restricted, Section 427 of ITEPA 2003 treats it as a “chargeable event.” The proportion of unrestricted value that wasn’t taxed at acquisition is then taxed as employment income.³

By the time restrictions lift, the company may have grown substantially. Without an election, you would owe income tax at rates up to 45% on growth that has nothing to do with the restrictions disappearing, purely because the shares were undervalued at acquisition. That is the cost the election avoids.

What Signing the Election Changes

When you sign a Section 431 election, HMRC treats the shares as if no restrictions exist for the purposes of computing income tax at acquisition. You are taxed on the Unrestricted Market Value (UMV) rather than the AMV. The charge equals the UMV minus what you paid for the shares.

The upfront bill is higher, but Sections 425 to 430 of ITEPA 2003 then no longer apply to those shares. When restrictions eventually lift, there is no chargeable event and no further employment income charge.⁴ Growth from that point onwards is a capital gain when you sell: 18% if you are a basic rate taxpayer, 24% if higher or additional rate. The £3,000 annual exempt amount shields part of your gains from tax entirely.²

The election is irrevocable. If the share price drops afterwards, you cannot unwind it. You will have paid income tax on a value the shares never reached when freely tradeable, and Part 7 of ITEPA 2003 provides no relief for that overpayment.⁴ You might recover some of the loss through capital losses on eventual sale, but the income tax paid at acquisition is gone. This risk deserves weight in early-stage companies with volatile valuations.

The 14-Day Deadline

The election must be signed no more than 14 days after you acquire the shares. If acquisition is on Day 1, the deadline runs until midnight at the end of Day 15. There is no extension, no reasonable-cause exception, and no administrative relief.⁵ Miss it and the opportunity is gone permanently for those shares.

The election can also be signed at any point before the acquisition date. That is the safest approach, because it lets companies pair the election with the share subscription paperwork. Chasing signatures afterwards is how deadlines slip, particularly for senior employees who are travelling or between roles.

One narrow fallback exists. If a restriction is later varied, the variation can create a fresh chargeable event under Section 430, and an election may be possible at that point. That is a different election covering a different event, not a second chance at the original acquisition election.⁵

Section 431(1) or Section 431(2)

There are two versions of the election.

A Section 431(1) election ignores all restrictions on the shares. Income tax and NICs are calculated on the fully unrestricted value at acquisition, and no future Chapter 2 charge can arise.⁶ This is the standard choice and the version HMRC’s template forms are built around.

A Section 431(2) election ignores only specific restrictions while leaving others in place. HMRC’s guidance gives the example of a company where a time-based vesting condition is expected to lift but pre-emption rights in a family company will remain indefinitely.⁶ A 431(2) election disapplies Sections 425 to 430 only for the specified restriction, so any remaining restrictions can still trigger chargeable events later. Unless legal advisers have flagged a specific reason to use 431(2), a 431(1) election is almost always preferable because it eliminates all future employment income exposure on those shares.

What the Election Document Must Contain

HMRC does not prescribe a single mandatory form, but the election must be in a form approved by HMRC and contain specific information.⁶ HMRC publishes template documents for both single-employee and multiple-employee elections, and most companies work from those. The document should include:

The full name and address of the employee (or prospective or former employee) and the employer. The election is joint, so both must be named.
The employee’s National Insurance number. HMRC’s guidance confirms a missing NINO will not invalidate the election if one is unavailable at the time.⁶
A description of the securities: the class of shares, the number acquired, and the date of acquisition.
An explicit statement that the election is made under Section 431(1) or 431(2) of ITEPA 2003.⁴
Signatures and dates from both the employee and a representative of the employer.

If you are using a Section 431(2) election, the document must also identify the specific restrictions being ignored. Referencing the wrong subsection can undermine validity, so working from the HMRC template or having counsel review the form is worth the effort.

National Insurance on Readily Convertible Assets

Income tax is not the only cost at acquisition. Where the shares qualify as Readily Convertible Assets (RCAs), PAYE and National Insurance are also due.⁴ Shares are generally RCAs if a trading arrangement, market, or mechanism exists through which they can be readily converted into cash. Publicly listed shares are almost always RCAs. Private-company shares may or may not be, depending on whether a buyback mechanism, internal market, or imminent sale process exists.

When a Section 431 election is made on RCAs, the employer must operate PAYE on the difference between the UMV and the amount paid for the shares, and both employer and employee NICs are due on that amount. Without the election, NIC would arise later on the chargeable event. The election front-loads the NIC liability in the same way it front-loads the income tax. That is advantageous when you expect the shares to appreciate, but if the shares lose value you have paid NIC on an unrealised gain, and Part 7 offers no mechanism to recover it.

When the Election Is Most Valuable

The strongest case for signing is early-stage companies where the shares are worth very little at acquisition. If the UMV is close to (or equal to) the price you pay, the income tax charge can be negligible or zero. You still sign the election, because doing so puts future growth into the capital gains regime. The protective effect against future employment income charges is the same regardless of how much tax is due at acquisition.

Consider founders or early employees acquiring shares in a startup at nominal amounts, paying that nominal amount, and signing a Section 431 election with no income tax due. Five years later the company is worth millions. Without the election, every restriction that lifts along the way would trigger an income tax charge on the growing value of the shares at up to 45%. With the election, the entire gain from the nominal acquisition price to the eventual sale price is a capital gain.

Business Asset Disposal Relief

If you hold at least 5% of the shares and voting rights in a trading company (or a holding company of a trading group) and have been an employee or officer of that company for at least two years before selling, your shares may qualify for Business Asset Disposal Relief. From 6 April 2025, BADR reduces the capital gains tax rate on qualifying disposals to 14%.⁷

A Section 431 election makes BADR more valuable. Without the election, a chunk of the gain on sale would be taxed as employment income at up to 45%, because it relates to the previously untaxed restricted portion. With the election, the entire gain from your acquisition cost base to the sale price falls within the capital gains regime, where BADR can apply. For qualifying shareholders in growing companies, the combination is one of the most effective tax outcomes available.

EMI Options: When You Don’t Need a Separate Election

Enterprise Management Incentive options interact with Section 431 in a specific way. When you exercise EMI options and the exercise is tax-relieved (the EMI scheme requirements are met), you are treated as having already made a Section 431 election. No separate paperwork is required.⁸ The shares are taxed at exercise as if unrestricted, and no further Chapter 2 charge arises when restrictions lift.

If the exercise is not tax-relieved, for example because a disqualifying event has occurred, you will need to sign a separate Section 431 election within 14 days of exercise to achieve the same protection. Without the election the AMV is used; with it, the UMV at the date of exercise applies.⁸ The same 14-day deadline applies.

Reporting and Record-Keeping

The signed election is not sent to HMRC when it is made. The employer reports it through the annual Employment Related Securities return, submitted online by 6 July following the end of the relevant tax year.⁹ If income tax is due on acquisition, the employee reports it on their Self Assessment return for that year, or the employer handles it through PAYE where the shares are RCAs.

The signed document itself must be retained. HMRC’s guidance states the company should store the election in a form that can be verified, since HMRC is entitled to request evidence that a valid agreement was made.⁵ Keep it for at least as long as you hold the shares, and ideally several years after disposal, because HMRC may query the capital gains treatment at that stage. Both employer and employee should retain their own copy. If a dispute arises years later about whether a valid election was made, the signed document is what settles it.

If You Also Need a US Section 83(b) Election

US citizens working in the UK, and employees of dual-jurisdiction companies, may need to make both a Section 431 election and a US Section 83(b) election. They solve the same problem but the details differ.

A Section 431 election must be signed within 14 days of acquiring the shares. A Section 83(b) election must be filed with the IRS within 30 days of the property transfer.¹⁰
Section 431 is a joint election requiring both employer and employee signatures. Section 83(b) is made solely by the taxpayer.¹⁰
The Section 431 election is retained by the parties and reported through the annual ERS return. The Section 83(b) election is mailed to the IRS office where the taxpayer files their return, with certified mail recommended as proof of timely filing.
Neither election allows any extension or reasonable-cause exception for a missed deadline.

The UK 14-day deadline always expires before the US 30-day deadline, so the Section 431 election is the more urgent of the two. Coordinate both early.

1
GOV.UK. Income Tax Rates and Personal Allowances
2
GOV.UK. Capital Gains Tax: What You Pay It On, Rates and Allowances
3
Legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 – Chapter 2
4
HM Revenue and Customs. Joint Election Under Section 431 ITEPA 2003 – Multiple Employees
5
HM Revenue & Customs. ERSM30460 – Restricted Securities: Elections to Exclude Outstanding Restrictions: Further Issues
6
HM Revenue & Customs. ERSM30450 – Restricted Securities: Elections to Exclude Outstanding Restrictions
7
GOV.UK. Business Asset Disposal Relief: Eligibility
8
GOV.UK. ETASSUM57150 – Taxation of EMI Options: Section 431 Election
9
GOV.UK. Employment Related Securities: Submit Returns
10
Internal Revenue Service. Instructions for Form 15620, Section 83(b) Election