A beginners guide to employee share schemes – Part 1
Employee share schemes, or ‘sharesave’ schemes as they are often known, are becoming more and more popular for UK businesses. Thousands of firms are now offering some type of share-save scheme, from banks to retailers, airlines and professional service firms and around 2 million employees are now involved in some form of scheme. So what are they and what are the advantages and disadvantages to businesses?
What is an employee share scheme?
Employee share schemes are arrangements provided to employees of a company to promote employee ownership. Employees are given shares in the company or are allowed to buy shares at some form of discount (but not always) and most schemes will have a tax benefit for the employee.
What are the different types of share schemes?
Save As You Earn (SAYE)
With SAYE, employees are given the opportunity to purchase shares at a discounted price. The offer price is a discount on the actual share price at the start of the scheme. Employees can then have up to £500 per month deducted from their net salary for either 3 or 5 years (the longer the period, generally the greater the discount, but the discount cannot exceed 20%).
At the end of the period, the employee can choose to either withdraw the cash, or convert them into shares at the offer price. Obviously if the share price at the end of the scheme is higher than the offer price the employee will convert, sell, and pocket the profit. No tax is paid on the difference between the offer price and the market value of the share (this would be a benefit-in-kind).
Companies vary on this, but some will offer the cash withdrawal with interest, or there may be a bonus on seeing the scheme through to the end, whatever the final decision. Interest and bonus payments are tax-free.
Should an employee leave in the period, they will be able to withdraw the cash from the scheme, and in case of redundancy, retirement or ill-health terminations, most schemes will allow the employee to convert what they have put into the scheme into shares.
The employee will still be subject to Capital Gains Tax upon disposal of the shares.
Share Incentive Plan (SIP)
With a SIP, shares are provided to an employee but they must be held for a minimum of 5 years before the employee can receive the associated tax benefit on the share value.
There are 4 methods of giving a share under this scheme:
• Free: Shares up to a value of £3,600 can be given to the employee each year.
• Partnership: Shares are paid for from gross pay, so there is an immediate tax benefit to the employee. The employee can only buy up to £1,800 (or 10% of gross income) of partnership shares per tax year.
• Matched: With a matched share, if the employee buys partnership shares, the employer can match them by giving up to two free shares for every partnership share the employee bought.
• Dividend: If an employee share scheme has shares built up that pay dividends, then the dividends can be used to purchase further shares which also enter the scheme (should the scheme allow). The employee will still be subject to Capital Gains Tax upon disposal of the shares.
Company Share Option Plan (CSOP)
With a CSOP, an employee is given the opportunity to purchase up to £30,000 of shares at a fixed price, without paying Income Tax or NICs on the difference between the share value and the price paid (this would otherwise be a benefit-in-kind). CSOPs are much rarer than the previous schemes, and are only usually offered to select staff. The employee will still be subject to Capital Gains Tax upon disposal of the shares.
Enterprise Management Incentive (EMI)
With EMI, an employee is given the opportunity to purchase up to £250,000 of shares at a fixed price, without paying Income Tax or NICs on the difference between the share value and the price paid (this would otherwise be a benefit-in-kind).
In order to be able to offer an EMI, there are certain criteria that the company must meet. For example, the company must:
• Be independent (not owned by another company, or less than 51% owned).
• Have gross assets of under £30m.
• Employ fewer than 250 employees.
As with the other share scheme options, employees will still be subject to Capital Gains Tax upon disposal of the shares.
*For more information on the criteria required to offer an EMI scheme, the team at Sanders would be happy to help. Get in touch by emailing us at firstname.lastname@example.org.
Unapproved Share Option Schemes
There are a range of unapproved share option schemes which we won’t dwell on too much. In simple terms these are schemes where a company awards shares to an employee, usually based on performance. They offer no tax benefit to the employee, and there are few limitations on what the company can pay.
Employee Shareholder Status (ESS)
A relatively new scheme introduced in September 2013. The basic idea is that a company can give shares to an employee, but the employee must waive certain employment rights. This is built in to the employee’s contract.
The minimum value of the shares must be £2,000. This valuation must consider any restrictions placed on the shares. There is no upper limit on the share value, and the employee cannot pay anything for the shares.
The employee must waive the following employment rights:
• Unfair dismissal rights: unless dismissal is based on discrimination or health and safety.
• Right to statutory redundancy pay.
• Right to request flexible working (except in 2 weeks following parental leave)
• Certain rights concerning time of for training.
• Employee must give 16 weeks’ notice for: early return from maternity, extra paternity leave and adoption leave.
As this involves a change in employment rights, there are a lot of legal hoops to jump through. The employee must provide a ‘written statement’ explaining all the details of the shares (and any associated restrictions and/or voting rights, including regulations around their disposal) and which employment rights are affected. The employee must then take independent advice (e.g. not provided by an in-house expert). The offer must then be accepted or rejected within 7 days of this advice being taken. There are also a lot of considerations the company must take before offering such a contract, such as:
• Does the company have authority to issue shares? (May be restricted by Articles of Association)
• What will be the impact on current shareholding?
• What will happen at the end of the working relationship?
In Part 2, we will be discussing the various benefits to your business and the things you need to consider before taking the decision to implement a scheme in your business.
For more information about employee share schemes, get in touch by calling 020 7317 0040 or emailing us at email@example.com.
*The information provided in this blog post is for guidance only and does not constitute professional advice. Advice should be sought from a professional accountant if you are considering implementing an employee share scheme in your business.