A section 431 election is a joint, irrevocable election by an employer and employee that restricted shares are taxed on acquisition as if they had no restrictions, which switches off the Income Tax charges that would otherwise arise when the restrictions later lift. It must be in an HMRC approved form and made no more than 14 days after the shares are acquired, with no extension. It is usually worth making when the shares are cheap now and expected to grow, because the extra tax today is small and future growth is then taxed as a capital gain.

What problem does the election solve?

Shares acquired through employment are often restricted securities under section 423 ITEPA 2003: they can be forfeited or must be sold below market value if the employee leaves, they cannot be transferred freely, or they lack some rights. Restrictions reduce the market value, and the employee is taxed, or pays, only on that lower restricted value at the start.

Chapter 2 of Part 7 then catches up. Each time a restriction lifts or varies, or the shares are sold while still restricted, there is a chargeable event (section 427). The taxable amount uses the formula UMV × (IUP − PCP − OP) − CE in HMRC’s manual at ERSM30400. In plain terms, the proportion of value that was neither paid for nor taxed at the start is applied to the much higher value at the later event, and that slice is employment income, with PAYE and National Insurance if the shares are readily convertible assets.

What does the election actually do?

There are two versions. A full election under section 431(1) treats the shares as unrestricted for working out their market value at acquisition and disapplies sections 425 to 430 entirely. A partial election under section 431(2) ignores only specified restrictions, for example where a restriction expected to lift is ignored but a pre emption right in a family company that will stay on the shares indefinitely is left in place.

The election changes the figure used in every charge that depends on market value at acquisition, including the money’s worth charge under section 62, the option exercise charge under Chapter 5, the Chapter 3C undervalue rules and the disguised remuneration rules in Part 7A. Once made, later growth is a capital gain, and the amount taxed as income is added to the Capital Gains Tax base cost.

A related election under section 430 can be made at a later chargeable event, treating all restrictions as lifted at that point, and section 425(3) allows an election to tax forfeitable shares on their restricted value at acquisition. Neither has the same effect as a section 431 election.

How is the 14 day deadline counted?

Section 431(5) says the agreement may not be made more than 14 days after the acquisition. HMRC reads this as: if the shares are acquired on day 1, the election must be signed before midnight at the end of day 15. There is no power to extend the time limit.

The election can be signed before the acquisition, and HMRC accepts one election covering multiple or future acquisitions. Before any later acquisition, the parties can agree to revoke it for that and future acquisitions. For shares acquired under an option, HMRC’s guidance counts the 14 days from the acquisition of the shares on exercise, not from the grant of the option.

Who signs, and in what form?

The employee must sign, even if the shares are acquired by a spouse, a family trust or a personal service company. The employer signing may be a group company rather than the company issuing the shares. HMRC publishes model forms for one employee or many, and accepts electronic signatures and other formats, such as an election written into a subscription agreement, provided the key terms are agreed in at least as much detail as the model form. HMRC will not pre approve documents.

Like the section 425 election, the signed election is kept by the employer and employee rather than sent to HMRC, and HMRC is entitled to see evidence of the agreement later. Keep it with the share records in a form that can be verified.

When is an election deemed to be made?

For shares acquired under a Share Incentive Plan, SAYE, CSOP or EMI, section 431A deems a full election to have been made, so the scheme relief covers the unrestricted value. The exception is EMI options granted at a discount, where relief is under section 531 rather than section 530: there is no deemed election, and the parties must decide whether to make one within 14 days of exercise. Section 431B also deems an election where the main purpose of the arrangements is avoiding tax or National Insurance.

When is it worth making?

  • When the employee pays full value. If the employee is paying what they believe is unrestricted market value, a protective election costs nothing and guards against HMRC later finding a gap between restricted and unrestricted value. HMRC says a protective election is not treated as evidence that a difference exists.
  • When value is low and growth is expected. The extra Income Tax today is on a small difference, and the future growth escapes the Chapter 2 formula. This is the usual position for growth shares and early stage companies.
  • When it may not be worth it. If the difference between restricted and unrestricted value is large and the employee may well forfeit the shares or see them fall, the election means paying tax now with no relief later. There is no Income Tax relief if the value later falls or the shares are surrendered; HMRC’s guidance on joint elections at ERSM30370 says so and notes that the approved forms include a declaration to that effect.

How does this work in figures?

Illustration only. An employee subscribes for shares with an unrestricted market value of £10,000. Leaver and transfer restrictions reduce their value to £7,000, which is what she pays. Five years later the company is sold and the shares are worth £100,000 with all restrictions gone.

  • No election. No charge at acquisition, because she paid the restricted value. The uncharged proportion is (£10,000 − £7,000) ÷ £10,000 = 30%. On the sale, 30% × £100,000 = £30,000 is employment income, and only the rest is a capital gain.
  • Full section 431 election. She is taxed at acquisition on £3,000, the difference between unrestricted value and the price paid. On the sale there is no Chapter 2 charge, and her capital gain is £100,000 less her base cost of £10,000, which is the £7,000 paid plus the £3,000 taxed, at Capital Gains Tax rates.

What mistakes come up most often?

  • Missing the 14 day window, typically on a completion where share documents are signed in a rush.
  • Assuming no election is needed because the employee paid “market value”, without checking whether that was restricted or unrestricted value.
  • Having the wrong company sign, or describing the shares incorrectly so the election does not cover all securities acquired.
  • Forgetting that discounted EMI options get no deemed election.
  • Not keeping the signed election, which HMRC may ask for years later.
  • Ignoring PAYE and National Insurance on the acquisition charge where the shares are readily convertible assets.

For the wider rules on shares from employment, see employment related securities basics.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.