Employee Share Schemes
Transitioning to Employee Ownership
Employee share schemes enable employees to acquire shares in the company that employs them. Employee share schemes can help align employee incentives with company objectives, attract new talent, and facilitate succession planning for existing shareholders.
When considering employee share schemes, it's important to be aware that if employees don’t pay market value for the shares, any difference between the price paid and the market value could be liable for tax.
Alternatively, employees can acquire their shares at market value without giving rise to any further tax implications using post-tax income. This arrangement can work well when combined with an EOT because immediately following completion of the transaction, the company shares have little value because of the debt owed to the previous owners. This means that they can be purchased by the employees when the value is low, however the shares then accrue in value throughout the payback period linking growth directly with employee incentives.
A tax efficient way of achieving the transfer of shares to employees is to use an approved employee share scheme. Employee share schemes approved by HMRC contain certain tax advantages and include the following schemes:
· Share Incentive Plans
· Save As You Earn
· Company Share Option Plans (CSOP)
· Enterprise Management Incentives
Employee share schemes can either enable employees to acquire shares outright or provide options to acquire shares in the future:
· Employee share schemes, Share Incentive Plans (SIP) and Save as You Earn schemes
(SAYE) allow employees to acquire shares outright
· Company Share Option Plans and Enterprise Management Incentive schemes allow
employees to acquire share options with the right to acquire those shares at a future
date at a pre-determined price, typically subject to fulfilling certain performance
SIP and SAYE are more commonly adopted in larger companies whereas Enterprise Management Incentives are a popular choice for SME’s. If a company does not qualify for EMI schemes, CSOP can deliver similar objectives, but in comparison tax benefits are not as attractive.
Unapproved joint share ownership plans can be another way to incentivise employees, which are essentially cash bonuses, taxed as such, but where the value of the cash bonus is tied to the share price of the company.
SIP and SAYE schemes are to be made available to all employees. EMI and CSOP however can be tailored and can be used to incentivise and attract key individuals.
If shares in Share Incentive Plans are kept for more than 5 years, they are not subject to income tax or National Insurance Contributions. If shares remain within the plan, there is no capital gains tax on their disposal after 5 years.
An employee can receive up to £3,600 of free shares in a year from their employers. Partnership shares can be purchased by employees using gross salary, of up to £1,800 or 10% of income, if lower.
SAYE enables employees to save up to £500 per month as part of a three or five-year savings contract. When the contract comes to an end, the savings are used to acquire shares. Interest and bonuses can be paid tax-free and the difference between the cost of the shares and their market value does not attract income tax or National Insurance liability. However, shares that are subsequently sold could attract capital gains tax
Company Share Option Plans (CSOP) provide an option to acquire up to £30,000 of shares at a pre-determined price. The difference between the cost of the shares and their market value does not attract income tax or National Insurance liability.
Companies that have assets of £30 million or less qualify for Enterprise Management Incentive (EMI) schemes and individuals are restricted to a maximum £250,000 in share options over a 3-year period. The shares do not attract income tax or national insurance contributions if they are acquired at market value when the option is first granted. Capital gains tax may be payable when the shares are sold.
Companies involved in banking, farming, property development, ship building, and legal services are excluded from issuing EMI options.