Employee share schemes are a way for employers to give their employees a slice of the business action, specifically by offering them an opportunity to acquire shares or share options in a company.
As an employee, taking advantage of a share scheme means putting yourself in a good position to profit from future growth and the success of your company.
How employee share schemes work
Employee share schemes in the UK are split into two broad categories: HMRC-approved schemes and unapproved share schemes.
The HMRC-approved schemes are the ones that most companies use because they come with tax advantages. They are:
1. Save As You Earn (SAYE)
A SAYE allows you to save regular monthly amounts (of up to £500) for a fixed period (three to five years) and then use the funds to buy shares free of income tax and national insurance. Alternatively, you can simply take the cash saved.
The interest and any bonus at the end of the scheme are also tax free. However, you might have to pay capital gains tax (CGT) if you sell the shares.
2. Company Share Options Plans (CSOP)
Under this scheme, which can be restricted to selected employees and full-time directors, an employee is granted options to buy up to £30,000 worth of shares at a fixed price.
Recipients must exercise the options between three and 10 years from the grant to achieve beneficial tax treatment. This entails no income tax or national insurance on the difference between what you pay for the shares and what they’re actually worth.
However, you may have to pay capital gains tax if you sell the shares.
3. Enterprise Management Incentives (EMIs)
EMIs are largely similar to CSOPs. Here, an employer grants employees options to buy shares up to a value of £250,000 in a three-year period. The total value of the options granted to all employees must not exceed £3 million. Recipients must also exercise the options within 10 years.
Tax benefits include no income tax and national insurance if you buy the shares for at least the market value they had when you were granted the option.
However, if you get them at a discount (below market value), you’ll have to pay income tax or national insurance on the difference between what you pay and what the shares are worth.
You’ll also have to pay CGT if you sell the shares (but at a reduced rate of 10%).
4. Share Incentive Plans (SIPs)
SIPs are different from other approved employee share schemes in that options are not actually granted to employees. Rather, employees are given shares that are held in the plan. All full-time and part-time employees of the company (subject to a minimum period of employment) must be eligible to participate in the plan.
The shares must remain in the plan for at least five years to avoid paying income tax or national insurance on them.
You will not pay CGT on shares you sell if you keep them in the plan until you sell them. But if you take them out of the plan, keep them for a while and then sell them later, you might have to pay CGT if their value has increased.
Shares in SIPs are awarded through one or a combination of the following:
- Free shares
- Partnership shares
- Matching shares
- Dividend shares
Which employee share scheme is best for you?
Ultimately, it is up to an employer to decide which share scheme to offer you. But if you work for a small business or company, it’s unlikely that they will offer you an SAYE or a SIP. That’s because these schemes must be open to all employees. They are most suited for larger, publicly listed companies.
Most small businesses will either go for a CSOP or an EMI. One of the main advantages of these schemes is that companies can choose the specific employees to grant the schemes to.
The tax advantages of a CSOP are less generous, leaving an EMI as perhaps the best option for both employer and employee.
An EMI is in fact the scheme of choice for many small businesses (those with assets of £30 million or less and fewer than 250 employees) that want to incentivise their employees by giving them a stake in the company.
Given the tax advantages and the fact that it allows for greater individual awards, an EMI is worth considering if your employer happens to offer it.
An employer can also chose to offer an unapproved share scheme. Most of these schemes are very flexible and easy to administer. The main problem is that they have a less favourable tax status. This means they may not be as beneficial as an HMRC-approved scheme.
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