Malcolm ZoppiTue Oct 17 2023
Understanding What are Employee Share Schemes: A Guide To Company Share Schemes
Employee share schemes are an increasingly popular way for companies to provide incentives for their employees. These schemes allow employees to own shares in the company they work for, either as a gift or by purchasing them at a discounted rate.
Employee share schemes are an increasingly popular way for companies to provide incentives for their employees. These schemes allow employees to own shares in the company they work for, either as a gift or by purchasing them at a discounted rate. Employee share schemes offer a range of benefits, including tax advantages and the potential for increased financial gains.
There are different types of employee share schemes available, including share options, incentive plans, growth shares, SIP (Share Incentive Plan), SAYE (Save As You Earn), and CSOP (Company Share Option Plan). Each scheme has its own advantages and considerations, and it’s important to understand them before committing to any scheme.
One of the major benefits of employee share schemes is the tax advantages they offer. Approved schemes can provide tax relief for both employees and employers, while unapproved schemes often offer income tax or national insurance savings. Understanding the tax implications of any employee share scheme is crucial to making an informed decision.
This guide will provide an overview of employee share schemes, the different types available, and the tax advantages they offer. It will also explore how these schemes work, the process of granting and exercising employee share options, and employee share purchase plans.
Key Takeaways:
- Employee share schemes allow employees to own shares in the company they work for.
- There are different types of employee share schemes available, including share options, incentive plans, growth shares, SIP, SAYE, and CSOP.
- Employee share schemes offer tax advantages that include savings on income tax and national insurance contributions.
- Understanding the tax implications of any employee share scheme is crucial to making an informed decision.
- It is important to comprehend the process of granting and exercising employee share options and employee share purchase plans before committing to any scheme.
Types of Employee Share Schemes
Employee share schemes are a popular method for companies to incentivise their employees by offering them a stake in the company’s success. There are various types of employee share schemes available, including:
| Type of Scheme | Description |
|---|---|
| Company Share Schemes | These schemes allow employees to purchase shares in the company. The shares can either be given as a gift or purchased at a discounted price. |
| Share Option Plans | Share option plans give employees the option to purchase a set number of shares at a fixed price on a future date. This is a popular scheme for startups, where the share price is likely to increase. |
| Incentive Plans | Incentive plans reward employees for achieving specific goals. The reward can come in the form of shares or cash. These plans are typically used to motivate senior management or key employees. |
| Share Incentive Plans (SIPs) | SIPs allow employees to purchase shares in the company on a tax-advantaged basis. The shares must be held for a minimum of five years to qualify for tax relief. |
| Save As You Earn (SAYE) | SAYE schemes allow employees to save a set amount of money each month for a set period, after which they are given the option to purchase shares at a discounted price. This scheme is popular with larger companies. |
| Company Share Option Plan (CSOP) | CSOPs are similar to share option plans, but they are only available to companies with fewer than 250 employees. They offer tax advantages to both the employer and employee. |
| Growth Shares | Growth shares give employees a share in the future growth of the company. The shares are typically only granted to senior management or key employees. |
It’s important to note that not all employee share schemes are approved by HM Revenue. Unapproved schemes can be subject to higher taxes and may not offer the same tax advantages as approved schemes.
The Dynamics of Company Share Options
Employee share schemes allow employees to purchase shares in their employer’s company. This ownership stake can incentivise employees to work harder, as their success is directly linked to the success of the company. There are various incentive plans available, some of which are approved by HM Revenue, while others are unapproved.
There are several types of plans available to employees. Company share option plans are a type of approved plan that allows employees to purchase shares at a fixed price. Unapproved schemes, on the other hand, can be tailored to the company’s specific needs, but the tax advantages are less favorable.
In addition to share options, employee ownership trusts can also be established. These trusts are approved by HM Revenue and offer various tax benefits. The company contributes shares to the trust, and the employees can then receive a portion of these shares as a bonus or incentive.
It is important to note that employees who hold an ownership stake in the company may be subject to income tax or national insurance contributions when they acquire shares or receive dividends. However, certain tax-advantaged schemes may allow employees to purchase shares without paying income tax or national insurance contributions.
| Type of Plan | Description |
|---|---|
| Company Share Option Plans | Approved plans that allow employees to purchase shares at a fixed price |
| Unapproved Schemes | Plans that are tailored to the company’s specific needs but offer less favorable tax advantages |
| Employee Ownership Trusts | Approved trusts that allow employees to receive shares as a bonus or incentive |
Employee share schemes can benefit both the employee and the company. By granting employees an ownership stake, companies can incentivise their workforce and increase employee satisfaction. Additionally, approved schemes can provide tax benefits for both parties.
Tax Advantages of Employee Share Schemes
Employee share schemes offer a range of tax advantages that make them an attractive option for both employers and employees. Here are some of the main benefits:
| Tax Benefit | Description |
|---|---|
| Tax relief | Employees can receive tax relief on the acquisition of shares, reducing their tax bill. |
| National insurance contributions | Employers do not have to pay national insurance contributions on shares acquired through approved schemes. |
| Tax-advantaged schemes | Approved schemes are often tax-advantaged, meaning that employees do not have to pay income tax or national insurance on the shares they acquire. |
It’s important to note that the tax treatment of employee share schemes can vary depending on the specific scheme and its approval status. Unapproved schemes, for example, may not offer the same tax benefits as approved schemes. Employers and employees should seek professional advice to ensure they fully understand the tax implications of any share scheme they are considering.
Granting and Exercising Employee Share Options
One of the most critical aspects of employee share schemes is granting and exercising employee share options. This process involves determining the value of the shares, understanding when an option is exercised, the functioning of share option schemes, and the requirement to pay income tax or national insurance when acquiring shares. In this section, we will provide insights into this process.
Value of the Shares
Before an employee can exercise an option to acquire shares, the value of the shares must be determined. It is essential to have a clear understanding of the valuation method used to ensure that the value of shares is fair to both the employer and employee.
Option is Exercised
If an employee decides to exercise their share option, they must notify the company. The value of the shares at the time of exercise determines the income tax and national insurance payable by the employee.
Share Option Schemes
A share option scheme gives employees the right to acquire shares in their employer’s company at a fixed or determinable price. Share option schemes may be approved or unapproved by HM Revenue. Approved schemes offer tax-advantaged shares while unapproved schemes may have significant tax consequences for employees.
Pay Income Tax or National Insurance
When acquiring shares, employees may be required to pay income tax and national insurance contributions. The amount payable is calculated based on the value of the shares at the time of exercise.
In conclusion, understanding the process of granting and exercising employee share options is crucial for both the employer and employee. It is essential to grasp the value of the shares, the timing of exercising options, the functioning of share option schemes, and the requirement to pay income tax or national insurance when acquiring shares.
Employee Share Purchase Plans
Employee share purchase plans are a form of employee share scheme where employees have the option to purchase shares in the company. By participating in this type of plan, employees can acquire shares in the company they work for at a discounted price and without having to pay any income tax or national insurance contributions on the discount. This can provide a valuable opportunity for employees to build long-term wealth and align their interests with the company’s success.
Unlike other forms of employee share schemes, employees in share purchase plans won’t receive shares for free. Instead, they have the option to buy shares in the company at a fixed price, often at a discount to the market price. The discount can be as much as 20% of the share price, making this a particularly attractive option for employees looking to invest in the company they work for.
One advantage of employee share purchase plans is that they are often open to all employees, regardless of their level or seniority within the company. This means that everyone has the opportunity to participate in the scheme and benefit from the potential growth in share value over time.
It is important to note that there may be restrictions on when shares can be sold, and that changes in the company’s share price can impact the value of the shares owned by employees. However, with careful management and a long-term view, employee share purchase plans can be an effective way for employees to acquire shares in their employer company and build their wealth over time.
Conclusion
Employee share schemes can be a valuable benefit for both employers and employees. By offering approved schemes, employers can provide incentives to their staff whilst also enjoying corporation tax benefits. Fixed prices for purchasing shares make the process straightforward and offer the potential for significant gains as the share price increases. With tax-advantaged schemes, employees have the opportunity to purchase shares in their employer company without paying income tax or national insurance contributions. This can be especially appealing for employees of listed companies where the share price is volatile and offers the potential for significant growth. In summary, employee share schemes provide an excellent way for employers to incentivise and retain their staff, whilst also enjoying corporation tax benefits. By offering approved schemes with fixed prices, employees have the opportunity to purchase shares in their employer company without paying income tax or national insurance contributions. This can be especially appealing for employees of listed companies where the share price has the potential for significant growth.
FAQ
Q: What is an employee share scheme?
A: An employee share scheme is a way for companies to distribute ownership or provide financial incentives to their employees by granting them shares or options to buy shares in the company.
Q: What are the different types of share schemes?
A: There are several types of share schemes, including Enterprise Management Incentive (EMI) schemes, Share Incentive Plans (SIPs), Save As You Earn (SAYE) schemes, Company Share Option Plans (CSOPs), and unapproved share schemes. Each has its own specific rules and tax implications.
Q: What is an Enterprise Management Incentive (EMI) scheme?
A: An EMI scheme is a type of share scheme approved by HM Revenue and Customs (HMRC) in the UK. It provides tax advantages for both the company and the employees. It allows employees to be granted options to buy shares in the company at a pre-determined price.
Q: How does an EMI scheme work?
A: In an EMI scheme, employees are granted options to buy shares in the company. The options can be granted at a discount to the market value of the shares. When the employee exercises the options and buys the shares, they are treated as a capital gain, which may be subject to capital gains tax (CGT).
Q: What is a Share Incentive Plan (SIP)?
A: A Share Incentive Plan (SIP) is another type of share scheme approved by HMRC. It allows employees to purchase shares in the company using their own money or through salary sacrifice. The shares are held in a trust on behalf of the employees.
Q: How do Share Incentive Plans (SIPs) work?
A: In a SIP, employees can purchase shares in the company either through their own money or through salary sacrifice. The shares are held in a trust, and the employees become beneficial owners of the shares. The value of the shares can increase or decrease depending on the performance of the company.
Q: What is a Save As You Earn (SAYE) scheme?
A: A Save As You Earn (SAYE) scheme is a type of share scheme that allows employees to save a specific amount of money each month for a fixed period. At the end of the saving period, employees can use the savings to purchase shares in the company at a pre-determined price.
Q: What is a Company Share Option Plan (CSOP)?
A: A Company Share Option Plan (CSOP) is a type of share scheme that allows companies to grant options to employees to buy shares in the company. The options can be granted at a discount to the market value of the shares and may have specific vesting periods or conditions.
Q: What is an unapproved share scheme?
A: An unapproved share scheme is a type of share scheme that is not approved by HMRC. These schemes do not have the same tax advantages as approved schemes, and employees may be subject to income tax and national insurance contributions on the acquisition of shares.
Q: What are the tax implications of employee share schemes?
A: The tax implications of employee share schemes can vary depending on the type of scheme and the specific circumstances of the employee. In general, employees may be subject to income tax and national insurance contributions on the acquisition of shares, and capital gains tax (CGT) when they sell the shares.
Q: How do employee share schemes benefit employees?
A: Employee share schemes can benefit employees in several ways. They provide an opportunity to share in the company’s success and financial growth, they can provide potential tax advantages, and they can promote a sense of ownership and loyalty among employees.
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Disclaimer: This document has been prepared for informational purposes only and should not be construed as legal or financial advice. You should always seek independent professional advice and not rely on the content of this document as every individual circumstance is unique. Additionally, this document is not intended to prejudge the legal, financial or tax position of any person.