Company share schemes are ways in which businesses can reward and incentivise their employees.
These schemes can help companies attract and retain top talent in a competitive marketplace.
For employees, they offer the potential to reap the rewards of future business growth financially.
How Company Share Schemes Work
There are two broad categories of company share schemes:
- HMRC approved, and
- Non-HMRC approved
HMRC-approved schemes are tax-advantaged. This means that the individual who buys the shares gets certain tax benefits as part of the deal.
However, there may be good reasons why a company instead chooses to offer its employees a non-HMRC approved scheme, without tax advantages:
- Not all companies qualify for tax-advantaged share schemes
- Some that do may find the rules too restrictive.
Either way, the idea is that the company uses shares to reward its employees.
Some of these schemes are selective and linked to performance, but others can apply across the board to all employees.
Tax-Advantaged Employee Share Schemes
- Save as you earn (SAYE)
- Share incentive plans (SIPs)
- Company share options plans (CSOPs)
- Enterprise management incentives (EMI).
In SAYE schemes, employees can save up to £500 a month for a fixed period of three to five years. They can use these saved funds to buy shares in the company.
These shares come free of income tax. Alternatively, the employees can cash in the saved amount without buying shares with it.
Any interest or bonuses are tax-free too.
Employees may be liable to capital gains tax (CGT) if they sell the shares, but they can transfer them to a stocks and shares ISA within 90 days of the end of the scheme. They can also transfer them directly to pensions.
In a share incentive plan (SIP), the company doesn’t grant share options to employees but instead gives them shares held in the plan.
To qualify, the company must be able to offer this to all full and part-time employees (applying a minimum period of employment).
The employees must keep their shares in the plan for at least five years. If they do this, they won’t pay CGT on them when they sell them.
The shares included in the plan can be free shares, partnership shares, matching shares or dividend shares, or a combination of these different share types.
Company share option plans (CSOPs) are different because they are designed for companies to use selectively if they wish. They can reward or incentivise selected employees by granting them options to buy up to £30,000 each in shares at fixed prices.
To enjoy tax benefits, employees offered these share options under a CSOP must exercise them between three and 10 years from when they receive the options.
Whatever the difference is between the original value and what the shares are now worth, employees will not be taxed on this amount.
They may, however, need to pay CGT if they sell the shares.
EMI schemes are similar to CSOPs. The employer can grant employees options to buy shares up to a value of £250,000 over three years.
The total value of shares they can offer to all employees must not exceed £3 million. Employees who take up these options must exercise them within 10 years.
If they buy them at market value, they won’t pay income tax or national insurance. But if the company offers share options at a discounted price, the employees will pay tax and NI on the difference between the offer and the market price.
CGT applies to shares when selling them, but at a 10% reduced rate.
Non-Tax Advantaged Share Schemes
For some companies, non-tax advantaged schemes may be a preferred option. This is because they have no statutory restrictions on participation levels.
Moreover, if the company wishes to impose its own restrictions, it can do so.
Consequently, there is a degree of flexibility with non-tax-advantaged share schemes. For fast-growing enterprises, the benefits for individual employees or directors can be substantial.
However, going down this route will also mean the company has various annual reporting obligations towards HMRC.
Are They Worth it?
The employer decides which scheme is most appropriate, depending on the size of the company.
SMEs are less likely to offer SIP or SAYE schemes because these schemes need to be open to all employees. Therefore, they are better suited to larger, publicly-listed companies.
But CSOP and EMI schemes can be effective ways for SMEs to reward and incentivise selected employees. Of these two types, the EMI has greater tax advantages at an individual level.
As we’ve noted, some companies may prefer non-tax advantaged schemes. These can be useful where the capital isn’t available to pay large, attractive salaries at the outset to attract talent.
Different schemes may be more or less the right fit for different companies, but they should consider their objectives before implementing them.
For hiring and retaining top talent, employee share schemes can be a very effective tool.
To find out more and for help selecting the best scheme for your business, please call us on 020 8088 2590, email email@example.com or fill in our contact form and we’ll be back in touch asap.