As an employee, you may have the opportunity to acquire shares in the company that employs you. This is known as an “Employee Share Scheme”.
Below we look at how Employee Share Schemes work and what tax advantages you will benefit from when you acquire, or dispose of, employment-related shares.
What is an Employee Share Scheme?
An Employee Share Scheme is where you are awarded shares in the company that you work for, or in a parent undertaking.
These types of scheme are predominantly used as a way of attracting and retaining staff, ensuring that employees have an incentive to promote the success of the company.
Employee Share Schemes are also a useful way for a company to raise funds, or to bolster the remuneration packages of key personnel when a business is still in its’ infancy.
What is an approved Employee Share Scheme?
Employee Share Schemes can be either approved or unapproved, where each scheme has its own rules, eligibility and tax treatment.
The government-approved schemes attract certain tax and national insurance benefits. As such, these schemes tend to be the most commonly used.
Government-approved schemes include the following:
- Share Incentive Plans
- Save As You Earn Schemes
- Company Share Option Plans
- Enterprise Management Incentives.
Approved schemes vary insofar as some permit employees to acquire shares outright, while others give you the option to acquire shares in the future. However, all approved schemes carry tax advantages.
If you are offered shares outside of one of these schemes, although these won’t have the same income and capital gains tax benefits, the flexibility of an unapproved scheme still has many benefits.
What is an Employee Share Scheme known as a “Share Incentive Plan”?
A Share Incentive Plan (SIP) is a government-approved scheme that allows qualifying UK employees to be granted free shares, and also allows them the opportunity to buy “partnership shares” up to a certain limit.
An employer can give each employee up to £3,600 of free shares in any tax year. Additionally, employees can buy partnership shares out of their salary, before tax deductions, of up to £1,800 or 10% of income, whichever is lower.
Your employer can give you up to two free matching shares for each partnership share you buy. You may also be able to buy more shares with the dividends you get from free, partnership or matching shares.
In the case of free and partnership shares, these will be free of income tax and National Insurance contributions where they have been kept in the plan for a period of five years. For dividend shares the period is three years.
Further, where you keep your employee shares in a SIP until you dispose of them, you will have no capital gains tax to pay in respect of their disposal.
If, however, you keep the shares after you take them out of the SIP and dispose of them at a later date when their value has increased, your cost for capital gains purposes will be their market value on the date the shares leave the plan.
What is an Employee Share Scheme known as a “Save As You Earn Scheme”?
Save As You Earn (SAYE) Schemes allow employees to save up to £500 per month and, at the end of either a three or five-year savings contract, use the accumulated savings to acquire shares at a fixed price.
You will not pay Income Tax or National Insurance on the difference between what you pay for the shares and what they are worth on the open market. Further, the interest and any bonus at the end of the scheme will be tax-free.
However, if you sell the shares you may be liable to some capital gains tax.
What is an employee share scheme known as a “Company Share Option Plan”?
A Company Share Option Plan (CSOP) provides an employee with the option to buy up to £30,000 worth of shares at a fixed price.
Under this type of scheme, you will not pay income tax or National Insurance contributions on the difference between what you pay for the shares and their market value at the date of purchase.
However, once again, you may have to pay capital gains tax when you come to dispose of the shares.
What is an employee share scheme known as an “Enterprise Management Incentive”?
Employee share options can also be granted under an Enterprise Management Incentive (EMI) where you work for a company with assets of £30 million or less.
However, the company must not be undertaking any excluded activity, including banking, farming, property development, shipbuilding and legal services.
Under an EMI the maximum grant of share options to any individual employee over a three-year period is £250,000.
You will not have to pay income tax or National Insurance if you acquire the shares for at least the market value at the date the option is granted, otherwise you will be liable to pay tax and NI contributions on any difference between what you paid and what the shares were worth.
There may also be capital gains tax to pay in respect of the disposal of the shares.
Transferring shares to Individual Savings Accounts
If you get employee shares through a SIP or a SAYE scheme, you can transfer up to £20,000 of these into a stocks and shares Individual Savings Account (ISA).
If you transfer your shares into an ISA, no capital gains tax liability will arise on either the transfer or on the later disposal of these shares.
However, you only have 90 days in which to make the transfer from when you took out your SIP or SAYE shares.
What is an unapproved Employee Share Option Scheme?
With an unapproved Employee Share Option Scheme, employees are given options to acquire a number of shares at a future date at a pre-determined price.
The big disadvantage with unapproved schemes is that there is no tax benefit for the recipient, as there is under government-approved schemes.
As long as the option to buy shares has to be exercised within ten years of its’ grant, there will be no tax or national insurance liability when the option is granted. However, on the exercise of the option there will be an income tax liability on the difference between the market value of the shares at that date, and the price paid for them.
On the disposal of the shares, the capital gain is calculated by comparing the disposal proceeds to the market value of the shares when the options were exercised. That said, unapproved share option schemes still have their advantages.
These types of scheme can be much more straightforward than other schemes, not to mention flexible, for example, where the ability to exercise share options can be governed by performance targets.
The unapproved scheme can also be set up on a selective basis for certain individuals, and shaped to suit the needs of both the employer and employee.
Key takeaway for “What is an Employee Share Scheme?”
Approved Employee Share Schemes can offer significant tax advantages to employees, although understanding how the different schemes work can be key to maximising any benefits.
It is therefore always best to seek specialist financial advice when acquiring or disposing of employee shares.
Your legal adviser can talk you through any available relief where a liability to tax does arise, for example, selling employee shares in several tranches so that each year’s gain is within your annual CGT tax-free allowance.
Your adviser can also discuss all of the benefits of any unapproved scheme.
Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert legal or other advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
