Many companies run share schemes for their employees. Often seen as part of their overall package of remuneration and benefits, employee share schemes provide tax advantages for employees compared to bonus schemes.
In this blog, we will explain the different types of employee share schemes and how they work.
How do employee share schemes work?
Employee share schemes give employees an opportunity to obtain a stake in the business and often provide a crucial incentive to promote the success of the company.
In other words, employee share schemes give members of staff “skin in the game” and can inspire them to work harder – or more effectively – to ensure their company prospers and the value of their shares increase.
There are various types of employee share schemes. The most common schemes give employees an option to purchase company shares at a fixed price for a specific period of time.
Other schemes involve providing company shares free of charge to new recruits as a form of joining incentive.
The schemes which have been approved by HMRC and provide a tax advantage consist of:
- Share Incentive Plans
- Save As You Earn
- Company Share Option Plans
- Enterprise Management Incentives
We will consider these, in turn, below.
Share Incentive Plans – long term employee share schemes
Share Incentive Plans (SIPs) enable employees to obtain shares which they are obliged to retain for a minimum period of 5 years. This employee share scheme allows shares to be distributed in four different ways:
- Free – employers are allowed to give away up to £3,600 of free shares in any tax year, to each company employee.
- Partnership shares – shares must be bought by employees with their gross salary in order to avoid paying income tax or National Insurance Contributions (NICs). There is a limit on how much can be spent on partnership shares: the lower of £1,800 or 10% of income for the tax year.
- Matching shares – employers are entitled to provide up to two free extra shares for each partnership share purchased by the employee.
- Dividend shares – some SIPs allow employees to buy extra shares with the proceeds of any dividends from their existing shares, known as dividend shares. If dividend shares are held for at least 3 years, there is no income tax payable.
As long as shares from a SIP are retained for at least 5 years, there will be no income tax or NICs payable in respect of their value.
Save As You Earn – employee share schemes to encourage saving
The Save As You Earn (SAYE) employee share scheme is designed to encourage employees to save a portion of their earnings.
SAYE is essentially a contractual savings agreement lasting either 3 or 5 years, which allows employees to save up to a maximum of £500 per month. It also delivers a tax free bonus on the savings.
At the end of the chosen savings period, employees have the option to purchase shares with their accrued savings. The cost of these shares is normally defined at the beginning of the contract.
There is no income tax of NICs payable on any difference between the price paid for the shares at the pre-defined rate and their market value at the time the option is exercised.
Company Share Option Plans – fixed price employee share schemes
A Company Share Option Plan (CSOP) provides employees with the option of purchasing up to £30,000 worth of company shares at a fixed price.
There is no income tax or NIC payable on the difference between the exercise price and subsequent sale price of the shares. Furthermore, there are Capital Gains Tax (CGT) advantages.
Enterprise Management Incentives – employee share schemes for SMEs
Enterprise Management Incentives (EMIs) are a form of employee share scheme open to companies with assets of £30 million or less.
EMIs allow employers to offer generous grant options up to a value of £250,000 in a 3 year period. Income tax and NICs are not payable on the purchase of these shares, subject to payment of at least the market value at the time the option was granted.
The Full Company Secretary Service from 1st Formations can help you with share allotments that may be needed to implement an employee share scheme.