Companies can use tax-advantaged employee share schemes to reward and incentivize workforces.
They help companies to recruit and retain talent as well as compete for the best employees in the marketplace.
Even for less well-established enterprises, including SMEs and startups, these schemes can be an effective tool in rewarding talent, especially in circumstances where the money isn’t readily available for large salaries.
There are benefits for both employers and employees.
What are Tax-Advantaged Employee Share Schemes?
Another name for tax-advantaged employee share schemes is employment-related securities (ERS).
These are shares or securities that a company offers to its employees.
These schemes are known as ‘tax advantaged’ because the way they work means that the individual receiving the shares or securities receives certain tax benefits that come with them.
Employers can benefit from tax-advantaged schemes too. For example, a business owner sells their shares into a share incentive plan to ultimately transfer all share ownership to the employees. If the owner does this, they will get capital gains tax relief.
For an employee share scheme to be tax-advantaged, HMRC must approve it.
Types of approved schemes include:
- Share incentive plan (SIP)
- Save as you earn (SAYE)
- Company share option plan (CSOP)
- Enterprise management incentive (EMI).
Share Incentive Plan (SIP)
In this type of employee share scheme, a company can offer its employees shares on flexible tax-advantaged terms in a variety of ways:
- It offers employees free shares, up to a market value of £3,600
- It allows employees to buy partnership shares using pre-tax earnings up to £1,800 or 10 per cent of their income
- It pays for additional shares to match those the employee buys
- It gives employees opportunities to buy dividend shares from dividends received from existing share schemes
These schemes are meant for all employees, and they award shares immediately, rather than offering future purchase options.
The company holds these shares in an employee benefit trust. Where an employee has free or matching shares, they must hold them in this trust for at least three years. If they hold them for at least five years, they won’t pay income tax or NI on them.
Save As You Earn (SAYE)
Here, employees buy company shares at a fixed price. They use the savings they’ve accumulated under the SAYE scheme.
Individually, they can put aside up to £500 a month for this purpose. At the end of the savings contract period, the employee can either buy fixed-price shares with their savings or take the money, including a bonus.
There are several tax-free aspects to this.
Employees pay neither income tax nor NI on the bonus, on any interest they’ve accrued, or on the difference between the fixed price of the shares and their market value.
Typically, large listed companies set up SAYE schemes due to the high employee demand that requires large numbers of shares.
Company Share Option Plan (CSOP)
This is a tax-advantaged, discretionary share option plan, under which the person acquiring the shares must pay the equivalent of market value.
The employee or director acquiring the shares can receive options up to a value of £30,000.
The shares are exempt from income tax if the person holds them for at least three years.
The company issuing a CSOP may want to do this selectively, using it as a rewards or incentive programme.
CSOPs are available for an independent company of any size to establish.
The individual limit on the value of shares awarded is £30,000 but there isn’t a limit on the overall value of options a company can grant under this type of scheme.
The tax advantages are less generous than the enterprise management incentive (see below). However, there are no qualifying restrictions on companies wishing to set up CSOPs.
Enterprise Management Incentive (EMI)
The EMI is for smaller, high-risk companies that want to attract and retain talented employees.
Share options under these schemes incur no income tax or NI contributions but they must be granted to employees at market value.
The employee receives an option to buy future shares in the company at a price agreed when the company grants the option.
If the share price rises in the period between granting the option and buying the shares, the employee will benefit.
For a company to qualify for an EMI it must not carry out excluded activities, such as:
- Trading involving land or investment assets
- Insurance, banking hire-purchase financing or other financial activities
- Legal or accountancy services
- Leasing or receiving licence fees or royalties
- Some property-backed trades
- Coal and steel production and shipbuilding
Under an EMI scheme, the company can grant share options up to a market value of £250,000 per employee. The total value of all options must not exceed £3 million. The company must not have gross assets above £30 million.
Generally, this type of scheme is used to reward individuals for meeting their performance targets.
How Should You Choose an ERS Scheme?
If you’re thinking about starting a tax-advantaged employee share scheme, you should consider:
- What sort of scheme your company qualifies for
- How much of the company you would want to give up
- Under what criteria, such as performance, you will allocate shares or options
- Whether the shares will be free of charge
- Whether employees will have restricted rights
- When you will grant shares or options
- What happens if employees want to sell their shares
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