Share Schemes can give tax advantages to both the employer and the employee.
As well as simply paying your employees in cash, approved Share Schemes can give tax advantages to both the employer and the employee, and help to make employees feel part of the company as they will benefit from the success of the company.
Many schemes make use of share options, which are the rights to buy a set number of shares within a given time window, at a price (the exercise price) that is fixed at the time the option is granted.
Tax Innovations has extensive knowledge and experience regarding the development, maintenance and reporting requirements of employee share schemes, so is ideally positioned to help tailor a scheme to your specific needs.
The types of tax beneficial employee share schemes are:
Share Incentive Plans (SIPs)
Employees can receive up to £3,000 of Free Shares per year with no income tax or National Insurance Contribution (NIC) consequences, if the shares are drawn after 5 years. They can also use up to £1,500 of those dividends per year to buy new shares, known as Dividend Shares, and any dividends so used are also free of income tax if the shares are held for 3 years.
An employee can also buy up to £1,500 of “Partnership Shares” (Max 10% of salary) each year and obtain tax relief on the purchase. The employer may issue up to 2 additional free “matching shares” with any partnership shares purchased.
The increase in value between withdrawal from the scheme and sale of the shares is chargeable to capital gains tax (CGT). Therefore CGT can be avoided by the employee by leaving the shares within the scheme until immediately prior to the sale.
Savings Related Share Option Scheme
This is also known as a Save As You Earn (SAYE) scheme.
The employer grants to an employee or director (participants) options to buy the employer’s shares in 3, 5 or 7 year’s time with an exercise price at today’s price or at a discount of up to 20% of that price. No income tax or National Insurance Contributions (NICs) will be chargeable where a share option is granted and exercised in accordance with an approved SAYE share option scheme.
Participants then pay a fixed amount of their salary into a savings account in order to save up the exercise price by the exercise date. This is deducted before tax, thereby saving the employee income tax & NICs. The difference between exercise of the option and a future sale of the shares is chargeable to CGT.
Shares acquired under a SAYE scheme can be transferred into an ISA or into a registered pension scheme on a tax free basis within 90 days of exercising the option. On such a transfer the market value of the shares at the date of transfer is the amount of the relievable pension contribution. There may, however, be a charge to CGT as the acquisition cost of the shares acquired under the SAYE scheme is often less than the current market value so a gain may arise on transfer.
Company Share Option Plans (CSOPs)
The employer grants to an employee or director (participants) options to buy the employer’s shares within a specified period of time at a fixed price not less than the market value at grant (No discount allowed). Up to £30,000 of options may be granted to each employee. Directors working less than 25 hours per week and individuals owning more than 25% of the share capital may not participate, however part-time employees may be included.
No income tax or NICs will be chargeable on grant of the options, nor is there income tax or NICs when the option is exercised between 3-10 years after grant.
The employee will exercise his option when the share price is above the exercise price. He can then sell the shares and make an immediate profit. The difference in value between sale price of the shares and the exercise price paid on the option is chargeable to CGT.
Enterprise Management Incentives (EMIs)
This is a self-regulated a Share Option Plan aimed at small trading companies therefore no HMRC approval is required.
The employer grants to an employee options to buy the employer’s shares within a specified period of time (max 10 years) at a fixed price not less than the market value at grant (No discount). Up to £250,000 of options may be granted to each employee with a maximum £3 million over all employees.
Any discount to the market value when the option is granted will be charged to income tax and NICs upon exercise. If structured correctly, no income tax or NICs will be chargeable on grant of the options, nor is there income tax or NICs when the option is exercised. The only tax chargeable on the employee will be CGT on the difference between sale price of the shares and the exercise price paid, when the shares are eventually sold.
Unapproved share schemes may still incentivise employees, however they will not obtain advantages for income tax and NICs. The difference between market price of the share purchased and the price paid by the employee is treated as earnings of that employee and taxed under PAYE rules.