A Slice of the Action: Company Share Schemes (Part 2)
In this two part series, we’ll be looking at the tax advantages of company share schemes for directors looking to reward, retain, and incentivise their staff.
In Part 1 we looked at Company Share Option Plans (“CSOPs”) and Enterprise Management Incentive schemes (“EMIs”) which are more common with SMEs.
In this part, we’ll be looking at Share Incentive Plans (“SIPs”) and Save As You Earn schemes (“SAYEs”) which can often be more appropriate for larger companies.
As we discussed in Part 1, providing employees with shares directly can come with significant tax and National Insurance Contribution (“NIC”) costs as well as cash flow problems for the employees receiving shares.
Tax Advantaged Share Schemes for Employees
Tax advantaged share schemes are a way to reduce the tax and NIC costs for companies wanting to provide shares to their employees.
SIPs and SAYEs are generally offered to a wider range of employees than CSOPs and EMIs due to the nature of these schemes. Further details are provided below:
Share Incentive Plans (“SIPs”)
SIPs don’t use option agreements and instead operate via trusts which acquire and hold certain shares in the company on behalf of its employees.
There are four basic types of shares and most have limits on how many can be put into the SIP for each employee:
|Free shares||Employers awarding based on set criteria||£3,000 p.a.|
|Partnership shares||Employees sacrificing their pre-tax/NIC salary and bonuses||£1,800 p.a (or 10% of salary and bonuses, if lower)|
|Matching shares||Employers matching an employee’s partnership shares||2 matching : 1 partnership|
|Dividend shares||Employees using dividends on shares already in the SIP||N/A|
No income tax or NIC is chargeable on the employee when shares go into a SIP. The company can claim a corporation tax deduction for free or matching shares.
Unlike in Part 1, SIPs must generally be made available to all employees (including part time employees) on similar terms (e.g. performance or length of service) and no discount is available on the price of the shares.
The tax and NIC consequences of withdrawing the shares will depend on the type of shares withdrawn and how long they have been in the SIP.
No income tax or NIC is chargeable if free, partnership, and matching shares remain in the SIP for at least 5 years. Dividend shares only need to be held for at least 3 years.
If shares are withdrawn before these deadlines, then income tax can become be payable. NICs may also be due if the shares are readily convertible assets (e.g. quoted shares). Certain exclusions apply such as withdrawals as result of death or redundancy.
Capital Gains Tax (“CGT”) can become payable when an employee sells their shares. A SIP share’s base cost is the market value at withdrawal, therefore in practice an an employee can avoid CGT on selling SIP shares by simply withdrawing them just before sale.
Save As You Earn schemes (“SAYEs”)
SAYEs are very simple compared to the other schemes discussed so far.
Like CSOPs and EMIs, the employer will grant the employee an option to buy shares in 3 or 5 years if they are still an employee at this time. The purchase price is fixed the date of the agreement and can be discounted by up to 20%.
In the meantime, the employee agrees to save between £5 to £500 a month into a SAYE account which they can access at the end of 3 or 5 years along with a tax free interest and a bonus. The employee can then choose to buy the shares with the funds or just keep the savings instead.
Like SIPs, employees may be able to exercise their options earlier in specific cases like death or redundancy.
All employees must be eligible to participate in the scheme however an employer can choose to exclude employees with less than 5 years of service.
Income tax and NICs aren’t payable at grant or when the employee choses to exercise the option.
CGT may be payable if the employee sells their shares and the chargeable gain (i.e. the proceeds less the price paid and allowable costs) exceeds their annual exempt amount (£12,000 in 2019/20).
As with Part 1, there are a range of conditions that need to be met by all parties for share schemes to operate effectively.
If you’re interested in tax advantaged share schemes and would like to know more, please contact a member of our team.
A Slice of the Action: Company Share Schemes (Part 1) (20 March 2019)
State Aid Approval for EMI Options Renewed (17 May 2018)
State Aid Approval for EMI Options Lapses (10 April 2018)
Employee Shareholder Status – Practical Benefits (15 May 2015)
Employee-Ownership Trusts – Who Can Benefit (15 May 2015)