Employee Share Schemes
There are a number of reasons why a company may choose to adopt a share scheme, some of which have been listed below:
To recruit and retain key employees within the business
To motivate employees and encourage improved performance
Tax efficiently increase remuneration packages
To plan for the future and help with growing the business
Types of Share Awards
Shares can be awarded using one of the following ways:
Share Options – right to buy a certain number of shares at a fixed price and within a set timeframe.
Share Purchase – right to buy shares at a discounted rate.
Share Awards – award of shares from the employer either at no cost to the employee or at a discount.
Share schemes can be categorised into two types:
Approved schemes meet HMRC qualifying criteria and as a result carry tax advantages
Unapproved schemes are any schemes that do not meet the HMRC criteria and therefore carry no tax advantages.
In order to operate a scheme within in this category, the company must seek HMRC approval and the scheme must comply with the HMRC guidelines set out. There are four main schemes which can fall within this category.
Share Incentive Plan (SIP)
This scheme is a flexible plan whereby it must be made available to all employees on similar terms but still allows the employer to reward specific performance. The plan operates by establishing a trust to acquire the shares which are then awarded to employees but still held on trust.
There are four ways in which an employee can receive shares from a Share Incentive Plan:
Free shares – employee can receive free shares worth £3,600 each tax year. These must be awarded to all employees on similar terms.
Partnership shares – employee may be invited to purchase partnership shares from pre-tax salary. The employee can purchase shares up to the value of £1,800, or 10% of your income for the tax year, if lower.
Matching shares – The employer can award a maximum of 2 matching shares for each partnership share purchased by the employee.
Dividend shares – Dividends received on any free, partnership or matching shares can be reinvested to purchase further shares. No income tax charge arises on dividend shares that have been held for 3 years
There are no income tax or National Insurance implications on the award of shares, however, if held for less than 3 years, income tax is charged based on the market value of the shares at withdrawal. For the dividend shares, the dividends used to purchase further shares become taxable if the shares are disposed of within 3 years of the date of purchase.
If the shares are held within the scheme for more than 3 years but sold within 5 years, there may be some tax implications. For Free and Matching shares, income tax will be payable on the lower of the Market Value at allocation or the Market Value at withdrawal.
For Partnership shares income tax is payable on the lower of the amount used to purchase the shares or the Market Value at withdrawal.
There is no implication for dividend shares withdrawn within 3-5 years.
If shares are held for more than 5 years, there will be no income tax or National Insurance implications.
Capital gains tax is chargeable on the growth in value from the date the shares are released from the SIP trust to the date of sale. Therefore, it is possible to mitigate a capital gains tax liability by withdrawing the shares from the trust on the same day as you sell them.
Partnership shares may be forfeited on cessation of employment but in that case the shares must be purchased for an amount equal to the salary used to purchase the shares in the first place or their market value at the time of forfeit if lower.
Save as you Earn (SAYE)
This scheme allows employees at all levels to invest in their company’s shares tax efficiently and this plan can be used alongside other share schemes.
Employees are granted options that will allow them to purchase shares in the company after three or five years. The options can be granted with a discount of up to 20% of the full market value of the shares at the date of grant.
It is a savings related scheme and so the employee must enter into a savings arrangement for the same period as the length of the option. The employee can make monthly savings between £5 and £500 from post-tax pay. The savings scheme may pay a bonus at the end of the savings period.
At the end of the term, the employee can use the funds to exercise the options or alternatively draw the money out. There is no income tax or National Insurance on grant or exercise of the option and any bonus or interest is tax-free.
There will be capital gains tax payable on the eventual sale of the shares with the gain based on the difference between the market value of the shares on sale and the exercise price.
Enterprise Management Schemes (EMI)
EMI schemes are designed for small and medium sized companies with a permanent establishment in the UK. This scheme is not required to be offered to all employees, so it can be used to reward key employees and made conditional based on performance.
To qualify under the EMI regime the numerous conditions need to be met, including:
Must have a permanent establishment in the UK
Must not be under the control of another company
Gross assets must be less than £30 million when EMI options are granted
Must have fewer than 250 employees
Shares must be ordinary, non-redeemable and fully paid up
Must not carry on an excluded activity such as, financial activities, legal services, farming and property development.
Need to work for an average of at least 25 hours a week or if less, 75% of their working time for the company granting the option.
Must not have a material interest in the business before the option is granted.
The company can grant up to £250,000 worth of share options to selected employees. The main tax advantages are:
No income tax or National Insurance payable on grant or exercise of the option (unless the option is granted at discount)
Any gains on the eventual sale of the shares may be eligible for entrepreneur’s relief.
Entrepreneurs relief is a valuable relief available to individuals which can reduce the rate of capital gains tax on the disposal of qualifying assets, provided all conditions are met. Claiming the relief means the qualifying gains are taxed at 10% subject to the lifetime limit of £10 million.
In order to qualify for entrepreneur’s relief on EMI shares, you must satisfy the following conditions:
Must be an employee of the company
The company must be a trading company
Must satisfy the above conditions for at least 24 months for disposals of shares after 6 April 2019)
Company Share Option Plans (CSOP)
These are a flexible way of rewarding specific employees and involve granting options over the employer company shares. There are no limits on the company size or number of employees so this scheme can be used by larger companies however, the conditions do apply to CSOPs, including:
Options must be granted at market value
Can only grant up to £30,000 of options to each employee
There is no income tax or National Insurance liability if the option is exercised no earlier than 3 years and no later than 10 years from the date of.
If the exercise of the option is outside the 3-10-year window, income tax and National Insurance will be payable.
On the eventual sale of the shares, capital gains tax will be payable on the market value of the shares at sale less the exercise price.
Where a share scheme does not fall into any of the above categories, it will be referred to as an unapproved scheme. There are no tax advantages of these schemes, however, they are still a useful tool for rewarding employees and helping grow the business.
The employer can grant options to the employee to purchase shares at a future date at a set price.
With these schemes, there is generally no tax charge on the grant of the option, but there is always a tax change when the employee obtains the shares.
The amount subject to income tax and National Insurance is computed based on the market value at exercise less the amount paid for the shares.
Many large companies operate unapproved schemes and offer a sell to cover option which is basically an option to sell some of the exercised shares on the same day to help cover the income tax and National Insurance liabilities arising.
On eventual sale of the shares, there will be a capital gains tax liability which is based on the increase in value from the date of exercise to the date of sale.
This article deals with UK tax matters only and has been prepared solely and exclusively for the purposes of information This article is prepared on the basis of the UK laws in force and current prevailing practice as at the date of this paper, and are subject to changes in any applicable laws occurring after We would suggest seeking professional advice before establishing and implementing a share option scheme.
FLM is an Appointed Representative of and represents only St. James's Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group's wealth management products and services, more details of which are set out on the Group's website The title 'Partner Practice' is the marketing term used to describe St. James's Place representatives. FLM Wealth Management is a trading name of Financial Lifestyle Management Ltd.