My colleague once told me about a time his employer paid him a performance bonus. But because of this bonus, he went into a higher tax bracket, meaning he needed to have more tax withheld – his whole fortnight’s salary, in fact. Some bonus!

Employee Share Schemes (ESSs) are a common incentive for employers to retain staff, particularly in the cash-strapped startup space. However, like my colleague’s performance bonus, ESS schemes can come with a big sting in the tail.

The value of shares issued under an ESS are treated as employee income, subject to reporting in a payroll return. However, unlike cash wages, there is typically no tax-deduction at source by the employer, so the employee is left to fund the tax bill. Further there might be no buyer for the shares they received, so they cannot sell them to fund the tax.

Thankfully, some new rules are coming along which promise to help, but with a potentially huge catch. 

From 1 April 2026, the ESS deferral rules will allow taxpayers to defer the date ESS income is recognized until a “liquidity event” occurs – when the company is sold, listed on a stock exchange, or shares are cancelled (bought back).

In theory, this means payment of tax should align with having cash in the bank, but this deferral could come at a cost. 

The ESS deferral rules delay the date the income arises until the liquidity event. But it also defers their valuation until this date, instead of when the shares were issued.

See the problem? The shares might not have been worth much originally, but when a liquidity event occurs, they could be worth much more, and the employee could end up paying much more tax.

Employees don’t have the option to opt out, either – it’s up to the employer, and the decision to apply the deferral rules applies to all shares issued under the scheme. 

As is often the case with tax, there’s pros and cons to applying these rules. If you’re an employer considering offering an ESS, get in touch to talk through the options. 

Alex Cull

Tax Partner, Greenhawk Chartered Accountants

0800 422 526 | [email protected] | greenhawk.co.nz

91 Sir Tim Wallis Drive, Wānaka