Employers love share incentive schemes. They help them attract the best talent and can be extremely tax efficient. What’s more, if you participate and the company grows you can share in that success. In the UK, around 2 million employees have bought shares under these types of scheme.
However, share schemes do have some downsides. So, if you’ve been offered a share scheme and would like guidance on what that means for you, you should seek legal advice and ensure you understand the short-term and long-term implications. It’s important to develop an understanding of any specific provisions or supporting documentation such as articles of association or shareholders agreements.
In this article, we look at the types of schemes available, their tax implications, as well as other important factors to consider.
What are the various types of scheme?
There are two main types of employee share scheme in the UK, tax-advantaged and non-tax-advantaged schemes. The most common scenario is that you’re given or invited to purchase shares or share options on attractive terms.
The most common of the tax-advantaged schemes are:
- Save-as-you-earn (SAYE). You make monthly contributions from your salary for a set number of years, after which time you can use the savings to buy shares
- Company share options plans (CSOP). You are invited to buy share options
- Share incentive plans (SIP). You’re given or invited to purchase shares
- Enterprise management incentive (EMI). You’re invited to buy options
The most common non-tax-advantaged schemes are long-term incentive and performance share plans. These are often awarded to senior executives at nil or nominal cost as part of a benefits package. There are also deferred bonus and share matching plans that are commonly used by listed companies.
For more information about the schemes see: What are employee share schemes and how do they work?
What are the tax implications of each scheme?
SAYE is, in effect, a savings plan with tax benefits. You can put anywhere between £5 and £500 from your post-tax salary every month into a share plan, and after three to five years reclaim the pot or use it to buy your employer’s shares at a fixed price.
Your employer will set the minimum and maximum contributions allowed, and the share purchase price. This can be up to 20% less than the value of the shares when the plan is set up.
The benefits of SAYE are as follows:
- If the shares have gone up in value since the start of the plan, you can get a real bargain as you only have to pay the fixed price agreed at the start
- If the shares have gone down in value, you can get your savings back – sometimes with interest, although the rate is currently zero
- Any interest or bonus you get at the end of the scheme, as well as any gains you make because the shares are worth more than you paid for them, are free of income tax and NI
You may need to pay capital gains tax (CGT) on your gains if you sell the shares, but you can roll them into an Isa or self-invested pension plan to avoid CGT on sale.
With a CSOP, you have the option to buy shares at an agreed price. If you exercise this option and make a gain because the shares have increased in value, you won’t pay income tax or NI on that gain. Like with SAYE, you may have to pay CGT.
The tax benefits of EMI schemes are similar to CSOPs. Any gain is free of tax and NI, provided you pay at least the market value of the shares at the time the scheme was set up.
With a SIP, you’re given or invited to buy shares in your employers company that are then held in a trust. After five years, you can sell them from the plan without attracting CGT, and you won’t pay any tax or NI on the shares. However, if you take them out of the plan and wait a while before selling them, you will be liable to CGT.
How much can you save, and how much can you buy?
With SAYE, you can save anywhere from £5 to £500 per month, depending on the amount set by your employer and described in the plan. You can buy as many shares as you like up to the value of your pot at the time of purchase.
With CSOP, you can buy up to £30,000 of shares at the fixed price.
EMIs allow you to buy up to £250,000 of shares in any three-year period.
SIPs work as follows:
- You’re given free shares. You can get up to £3,600 of these in any tax year
- You buy ‘partnership’ shares. You can buy up to £1,800 (or 10% of your annual income) of shares from your pre-tax income
- You get ‘matching’ shares worth up to an additional £3,600, where you get up to two free shares for every partnership share you buy
- You buy ‘dividend’ shares. You can buy shares out of the dividends you receive from your partnership or matching shares
Because many employees have been furloughed due to Covid-19 or are taking unpaid leave, HMRC have made some adjustments to the rules.
- With SAYE, you can take savings out or take a savings holiday for a short period of time. If you’re on unpaid leave, you can make payments from your own money rather than from salary.
- With CSOP and EMI, if you go part-time for a while, your options will remain qualified options.
- With SIP, you can stop making scheduled contributions to buy shares, but can’t make up any payments you’ve missed.
When can you exercise options?
To qualify for tax benefits under a CSOP, you must exercise your options between three and ten years after you’re granted them. With EMIs, you must exercise the options before ten years are up.
Are there any restrictions?
There are some restrictions to the plans, and these are described in detail on the government website.
- For CSOPs, not all employees may be invited to join the plan. Also, your employer may make exercise of the option conditional on your meeting performance targets. There are also certain tax restrictions.
- With SIPs, any award of shares may be conditional on good performance, and any awards may affect your entitlement to benefits. As with CSOPs, there are certain tax restrictions.
- EMI plans can be tied to good performance, and if you’re a part-timer you may not qualify. A company can’t tie up more than £3,000,000 of its shares in an EMI at any time.
What happens if you want to leave the company?
Each employer will lay down rules in its plan that describe what happens if you leave the company, and you can find out more about this in are levers provisions article. In the case of SAYE, you should be able to take out the money you’ve saved.
What else you need to think about
The type of share scheme you’re offered and its exact terms will be up to your employer. If you work for a SME, they’ll most likely set up a CSOP or EMI scheme, as these allow employers to choose who they offer shares to. With SAYEs and SIPs, the schemes must be open to all staff, and so they suit larger companies whose shares are listed on the stock exchange.
In terms of tax advantages and amounts on offer, an EMI is probably the most generous scheme, so if you’re at management level this is the best one to go for.
Your employer may set up a share scheme that has no particular tax benefits, and these are known as non-tax-advantaged schemes. They may, however, prove valuable and offer shares at a good price.
One final thing to think about is that share ownership isn’t for everyone, and shares can go down in value as well as up. You should also be careful not to rely too much on employer shares as part of your investment portfolio and diversify into other assets too.
If you’ve contributed to a SAYE and your employer goes belly-up, you can lose your pot, although the government does provide a guarantee of up to £85,000 per person. In addition, the interest or bonus paid to you on your savings in the pot is currently nil, so you may get a better rate if you put your money elsewhere.