Share schemes are ways in which employers can offer employees shares in the business, designed to incentivise by giving people an additional direct stake in a business’s success, and a reward for good performance. They also usually carry tax advantages.

The principal types of share schemes are:

  • Enterprise Management Incentives
  • Employee Shareholder Status
  • Company Share Option Plans
  • Share Incentive Plans
  • Save As You Earn

Enterprise Management Incentives

These are tax-advantaged share options designed to help trading companies succeed by recruiting and retaining key employees.

Employers can give employees the option to acquire shares in the future, but at a price set at the date the shares are granted. The tax advantages are key and are summarised as follow:

  1. On grant of the option – no Income Tax or National Insurance will arise.
  2. On exercise of the option – no Income Tax or National Insurance will arise.
  3. On sale of the shares – Capital Gains Tax is likely to be suffered at a rate of just 10%.

In addition, the employer company will normally be entitled to a corporation tax deduction equal to the total value of the options exercised, less any payment made by the employee on exercise.

There are certain restrictions regarding the size and trading activities of the company and on the eligibility of the employee.

Employee Shareholder Status

Employees can forfeit certain employment rights in order to acquire free shares which qualify for beneficial tax treatment.

Employers can offer employees the opportunity to acquire free shares in return for forfeiture of certain specific employment rights such as unfair dismissal, flexible working and statutory redundancy payments. The tax advantages are summarised as follows:

  1. Shares worth between £2,000 and £50,000 can be gifted to the employee, the first £2,000 being free from income tax on acquisition.
  2. Shares acquired under ESS will be free from Capital Gains tax on sale.
  3. A corporation tax deduction equal to the shares market value at acquisition will be available.

There are few restrictions with regard to eligible companies and individual however there are key processes to be undertaken and the individual cannot hold a material stake in the company.

Company Share Option Plans

These are tax-advantaged share options which can be issued to selected directors and employees over shares with a value of up to £30,000.

Employers can offer key individuals the option to acquire shares at a later date subject to a maximum market value of £30,000 per individual at the date of grant. Tax advantages are available where the options are held for at least three years. The tax implications are as follows:

  1. On grant of the option – no Income Tax or National Insurance will arise.
  2. On exercise of the option – no Income tax or National Insurance will arise.
  3. On sale of the shares – Capital Gains Tax will apply at 18%/28% on any gain

Given the limited value of shares which can be granted to individuals, there are fewer restrictions on the eligibility of the Company and the individual than those for Enterprise Management Incentives.

Share Incentive Plans

Employers can award shares to all employees for free or for a price on a tax-advantageous basis.

In order to implement a Share Incentive Plan, participation must be offered to all employees rather than a selected group of employees. Shares are held in trust for the employees and are awarded using four different methods:

  • Free shares – awarded for free by the Company (maximum of £3,600 per year)
  • Partnership shares – purchased out of pre-tax earnings (maximum of £1,800 per year)
  • Matching shares – the Company can award up to two matching shares for each partnership share purchased
  • Dividend shares – dividends normally payable on any of the above can be converted into shares

If shares are held in trust for five years, no Income Tax or National Insurance will arise when the shares are withdrawn from the trust. Further, any gain in value whilst the shares are in the trust will be exempt from Capital Gains Tax.

Save As You Earn

A SAYE plan enables employees to be granted options to acquire shares through three or five year savings contracts.

Employees can save money over a three or five year period following which, the proceeds can be used to buy shares on exercise of the options or withdrawn as cash. The minimum monthly contribution is £5 and the maximum is £500. The employee is also entitled to a bonus equivalent to a predetermined number of monthly contributions. Tax advantages are as follows:

  1. On grant of the option – no Income Tax or National Insurance will arise.
  2. On exercise of the option – no Income tax or National Insurance will arise after three years.
  3. No Income Tax is payable on any bonus or interest  received.
  4. On sale of the shares – Capital Gains Tax will apply at 18%/28% on any gain.

More information on share schemes

If you need guidance, or have any questions, please get in touch with Neil Norman on 0131 5585800 or entrepreneur@chiene.co.uk.

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