Employee Share Schemes can be essential in keeping your workforce happy and motivated whilst enhancing their overall performance, a critical factor to the growth and success of your business.
This article explores the intricate landscape of Employee Share Schemes, including the types of schemes available, the key benefits of each, and the potential tax benefits and considerations that may be faced when implementing any share scheme.
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What is An Employee Share Scheme?
Employee share schemes are programs established by employers to allow employees to acquire shares or ownership in the company, typically as a form of additional compensation or incentive.
Share incentive schemes for employees are designed to align the interests of employees with those of the company and can take various forms, including stock options, share purchase plans, or awards of company shares. They aim to promote employee retention, motivation, and a sense of ownership in the business.
Key Benefits of Employee Share Schemes:
- Attract and Retain the Best Talent – Opportunity to retain the right people for your business by giving them a more personal interest in the company and its success.
- Increase Productivity and Performance – Incentivise the talent in your team by giving them a financial interest in the company’s performance.
- Improve Employee Satisfaction – Boost job satisfaction and morale with the knowledge that the employee’s efforts will benefit them financially.
- Tax Benefits – There may be tax advantages for the employer and employee with some share schemes, making them a financially attractive option.
The Different Types of Employee Share Schemes
Companies can use several employee share schemes to reward and help retain employees, including share ownership and HMRC-approved share schemes.
Share ownership for employees manifests itself into two categories:
- The company issues shares to employees directly.
- The company grants the employee the option to acquire shares in the future.
Direct Share Issue
A direct share issue in an employee share scheme is a process by which a company offers its employees the opportunity to purchase company shares directly from the company itself. This is often done at a discounted price or with other favourable terms. Employees typically acquire these shares as a part of their compensation package.
Giving shares to an employee will likely impose an income tax charge on the employee at the gift date. This follows the fundamental principle that giving an asset to an employee for less than it is worth gives rise to a taxable benefit. To avoid an income tax charge, the employee must pay the total market value for the shares.
Employee Shareholder Schemes
The Government introduced a new “Employee Shareholder” status for employees in 2013.
The legislation allows employers to offer tax-efficient shares to employees in exchange for surrendering certain employment rights.
If employees accept this ‘Employee Shareholder’ status, they can receive between £2,000 and £50,000 worth of shares in their employer company. The total market value must be paid to avoid an income tax charge on acquiring these shares.
Joint Share Ownership Plan (JSOP)
An alternative is a JSOP arrangement. This is when the employee jointly acquires shares with a third party, usually an Employee Benefit Trust, increasing the beneficial interest in the shares up to a specific value. The employee will be entitled to receive only the growth in the value of the shares over and above that particular value.
If the employee pays the market value price for the interest acquired, there should be no income tax implications on the acquisition, and the only tax charge to consider will be the capital gains on the growth of the shares.
HMRC-Approved Share Schemes
There are a variety of share incentive schemes for employees which are HMRC-approved:
Enterprise Management Invectives (EMI)
EMI is a tax-advantaged share option scheme that allows employers to grant employees the right to buy company shares at a set price in the future. It’s designed to incentivise and reward key employees by giving them a stake in the company’s success.
Company Share Option Plans (CSOP)
Company Share Option Plans are an employee share scheme allowing employees to acquire shares in the company they work for. These plans provide employees with a financial stake in the company’s success, which can align their interests with those of the company’s shareholders and serve as a valuable employee retention and motivation tool.
There are limits on the number and value of shares that can be granted to employees through CSOPs, which are set by law.
Save As You Earn Scheme (SAYE)
Save As You Earn schemes allow employees to save a portion of their salary over a specific period, typically three, five, or seven years, with the option to use those savings to purchase shares in their employer’s company at a predetermined price.
Share Incentive Plans (SIP)
Share Incentive Plans (SIP) are designed to encourage employees to become shareholders in the company they work for. Employees are given or can purchase shares in the company, or shares can be awarded or sold at a discount to market value or as part of an employee’s regular compensation package.
One of the key benefits of SIPs is the favourable tax treatment they receive. For example, shares awarded to employees through a SIP can be free from income tax and National Insurance contributions.
Company & Employee Tax Benefits & Considerations
An employee share scheme can offer various tax benefits to a company and its employees. These benefits include advantages related to income tax, capital gains tax, National Insurance Contributions (NIC), PAYE (Pay As You Earn), and corporation tax.
Employees who participate in specific share schemes may receive tax advantages. For instance, under the Enterprise Management Incentive (EMI) scheme, employees may pay a lower income tax rate on their gains when exercising their share options.
In addition, some share schemes may enable the company to claim a tax deduction for the cost of providing shares to employees. This can reduce the company’s overall income tax liability.
Capital Gains Tax
Capital gains tax is calculated by the type of share scheme employees are part of, and some share schemes can provide relief or a reduced rate on the disposal of shares.
National Insurance Contributions
The company might not have to pay NIC on the value of the shares provided to employees through certain share schemes. However, this can vary depending on the scheme and the value of the shares.
Employee share schemes can also have implications for PAYE, which is the system used to collect income tax and NIC from employees’ salaries. The method and timing of withholding tax through PAYE can differ depending on the scheme.
The cost of setting up and administering an employee share scheme is typically tax-deductible for the company. This can reduce the company’s overall corporation tax liability.
Although the tax rules that are applicable to share incentive schemes can be complex, there are significant benefits for companies that offer them in attracting and retaining top talent. Employee share schemes can act as a catalyst for increased productivity, heightened job satisfaction, and the alignment of employee and company interests.
Before implementing any employee share scheme, we recommend you get qualified tax advice for your business. Contact us to find out more about the types of employee share schemes you may be able to offer and any tax benefits or implications you may face.