In certain circumstances, larger companies and those with a progressive outlook will issue shares to employees as part of a benefits package. Setting up employee share schemes can be mutually beneficial to both companies and employees in terms of tax savings opportunities, attracting and retaining the very best talent, and creating a happy and productive work culture within the company.
There are several different types of employee share schemes available. Sometimes these will involve giving shares to employees free of charge, possibly as a joining incentive or bonus.
More commonly, however, these schemes provide an option for employees to purchase company shares at a fixed price for a certain period of time. This is often the market value at the point when the share purchase option was initially granted.
This scheme entails retaining shares within a Share Incentive Plan (SIP) for a minimum of 5 years. Leaving the shares in the plan means that there won’t be any Income Tax or National Insurance contributions (NICs) to pay in respect of the value of the shares. Capital Gains Tax (CGT) may need to be paid if these are later sold and a profit is made on an increase in their value.
Shares under SIPs can be obtained in four different ways:
Save As You Earn is a savings-related share scheme that allows employees to save up to a maximum of £500 each month as part of a savings contract that lasts either 3 or 5 years. Shares can be purchased at the end of this period using the accrued savings, with two tax advantages:
A Company Share Option Plan gives employees the option to purchase up to £60,000 worth of company shares at a fixed price, without being liable for any Income Tax or NICs in respect of any difference between the price paid for the shares and their market value. CGT may be payable upon the sale of shares.
Subject to certain exclusions, companies with assets of £120 million or less are able to grant share options to their employees, up to a maximum value of £250,000 in a 3-year period, through an Enterprise Management Incentives scheme. There is no Income Tax or NICs payable as long as the market value (at the time the option is granted) is paid.
Employee shareholder schemes used to be a popular type of employment contract under which employees received shares with tax advantages in return for relinquishing certain employment rights. Although these schemes are still running, the tax advantages were abolished for new contracts drawn up after December 2016.