Overview: Employee Share Schemes
There are numerous reasons to set up an employee share scheme. You might be a start-up and you’d like to offer your employees shares as part of their remuneration package or maybe you want to make your employees feel part of the business and increase morale. Whatever the reason, HMRC fully endorses this behaviour and has hand-picked a selection of share schemes for which they offer tax benefits. Each scheme offers different benefits as they have been set up for different purposes, so you need to make sure that the scheme aligns with your specific situation.
The four main schemes are:
Save As You Earn (SAYE)
Share Incentive Plans (SIP)
Company Share Option Plans (CSOP)
Enterprise Management Incentives (EMI)
Save As You Earn
This savings-related share scheme allows employees to save up to £500 per month for three or five years. At the end of this time, the employee can use the savings pot to purchase shares at a fixed price. Employees get a tax-free bonus if they complete the savings plan.
The advantages here are that the bonus and interest at the end of the scheme are tax-free. In addition, the Income Tax or National Insurance does not have to be paid on the difference between what was paid for the shares and what they are worth.
You may have to pay Capital Gains Tax if you sell the shares.
You will not pay Capital Gains Tax if you transfer the shares:
to an Individual Savings Account (ISA) within 90 days of the scheme ending (up to the £20,000 allowance per year)
to a pension, directly from the scheme when it ends
*You may have to pay Capital Gains Tax if they go up in value between when you buy them and when you transfer them.
Final points of note:
A further benefit is that the shares can be discounted by up to 20% of the grant date value.
ALL EMPLOYEES must be offered the opportunity to join the scheme.
This is an option scheme, and the employee is not obligated to exercise the option, they can simply withdraw their savings at the end of the period.
No employer’s National Insurance will be due on the exercise of the options.
The company may be able to claim a corporation tax deduction under statutory rules for option gains realised by its employees together with a deduction for the costs of setting up the plan.
Share Incentive Plans
If you receive shares through a Share Incentive Plan (SIP) and keep them in the plan for 5 years, you won’t pay Income Tax or National Insurance on their value.
You will not pay Capital Gains Tax on shares you sell if you keep them in the plan until you sell them.
If you take them out of the plan, keep them and then sell them later, you might have to pay Capital Gains Tax if their value has increased.
There are four ways you can get shares under SIPs:
Your employer can give you up to £3,600 in free shares every year.
You can purchase partnership shares out of your salary at a maximum of either £1,800 per year or 10% of your income, whichever is lower.
Matching shares where the employer can gift up to 2 free matching shares for each partnership share owned.
Depending on whether your employer allows it, you may be able to use the dividends from the three types of shares above to purchase more. * You do not pay Income Tax and National Insurance on any SIP shares provided you do not withdraw these shares early. Early Withdrawal of shares:
Within three years- If shares are withdrawn within three years, Income Tax and National Insurance become liable to the employee.
Between three and five years- Income Tax and National Insurance become due based on the lower of:
the share market value at the date of withdrawal, and
the salary used to buy the shares (for partnership shares) or market value on acquisition (for matching and free shares).
Final points of note:
Similarly to SAYE shares, you must offer this scheme to ALL EMPLOYEES.
The company must be listed.
The employer is entitled to corporation tax relief for:
The employee’s salary used to buy partnership shares
Any additional costs incurred in providing partnership shares
The market value of matching shares and free shares when they are acquired by the trust
The set up and running costs of the SIP
Company Share Option Plans (CSOP)
This gives the employee the option to purchase up to £30,000 worth of shares at a set price.
You do not need to pay Income Tax or National Insurance on the difference between what you pay for the shares and what they are actually worth, however you may have to pay capital gains tax.
Final points of Note:
Unlike EMI below, there is no limit based on company size or number of employees
Options must be granted at market value
Any gain is only exempt from Income Tax and National Insurance if held for at least three years
Unlike SAYE and SIP plans, you do not need to offer the scheme to all employees
£30,000 in options can seem relatively low, especially compared with EMI below where up to £250,000 in options may be offered, a non-HMRC approved scheme may be offered alongside this scheme by your employer to compensate
Enterprise Management Incentives (EMI)
EMI options are specifically designed for trading companies with growth potential with the aim to help recruit and retain employees. This is especially useful for start-ups.
Main features:
The company must have less than £30 million in net assets and not be a disqualifying trade
The company must have less than 250 full-time employees
The company can grant share options up to £250,000 every three years
There is a £3m limit on share options granted
No Income Tax or National Insurance due on grant or exercise of the options
Capital Gains Tax at 20% would be payable, unless you have held the options for over 2 years, in which case you can use Entrepreneur’s relief to reduce this to 10%
A company can receive advanced assurance from HMRC to ensure they qualify for the EMI scheme
Unlike SAYE and SIP plans, you do not need to offer the scheme to all employees
* You will need to pay Income Tax and National Insurance if you were given a discount on the market value
Final Thoughts
EMI is by far the most popular scheme, typically offering tax free benefits right up to the point of selling the shares, where usually only 10% tax is charged under Entrepreneur’s Relief. EMI is only tailored to early-stage companies with limitations on total amounts granted.
CSOP is designed for larger companies as there is no limit on the company size, however there is only a maximum of £30,000 of options on offer per employee. Compared to EMI this is very limiting and bigger companies usually offer non HMRC approved option schemes in conjunction with CSOP.
SIPs offer flexibility in option offerings via various methods such as free, partnership, matching or dividend options. Unlike EMI and CSOP, all employees must be offered onto the scheme making it difficult to recommend.
SAYE offers the opportunity to have your employees invest monthly into the scheme. The scheme however may only be exercised after 3 or 5 years. This means that employee retention should also increase. Just like SIP all employees must be offered onto the scheme.
If you are considering setting up an HMRC approved share scheme, get in touch for a free intro call.