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Employee share schemes

Supporting you to do the best for your staff

Share incentive plans (SIPs) include three elements you can combine in different ways to suit your business (limits are for each employee):

  • free shares up to a limit of £3,000 in any tax year
  • partnership shares (bought out of pre-tax and NIC salary) up to £1,500 in any tax year (or 10% of overall salary, whichever is lowest); there might be a minimum limit of up to £10 on any occasion, and shares can be bought annually rather than monthly
  • matching shares, which your company provides to match employees’ purchase of partnership shares, up to a limit of two for each partnership share purchased; again there’s a limit of £3,000 in any tax year.

The plan must be made available to all employees, but you can set a qualifying period of up to 18 months. You can vary the value of the free shares you give to each employee on the basis of remuneration, length of service, hours worked, or performance.

Employees taking part must not have a material interest in the company (that is, owning or controlling more than 25% of its ordinary share capital). This also applies to the preceding 12 months.

For free and matching shares, employees are contractually bound to keep them in the plan for between three and five years. The shares can be dividend shares, and you can choose to make dividend reinvestment compulsory or optional. Total dividend reinvestment for any participant must not exceed £1,500 in a tax year. The holding period for dividend shares is three years.

Shares have to come out of the plan when employees leave their job. You can decide whether employees lose their free or matching shares if they leave within three years, and whether employees who leave have to sell their shares.

Tax benefits

Employees who keep their shares in the plan for five years pay no income tax or national insurance on them.

If they keep them for three years, they pay income tax and national insurance on the initial value of the shares; any increase in value will be tax-free.

Employees who keep their shares in the plan until they sell don’t have to pay Capital Gains Tax. If they take them out and sell later, they pay Capital Gains Tax only on any increase in value after the shares came out of the plan.

Enterprise Management Incentives (EMI)

Under EMI, certain small higher-risk trading companies (quoted or unquoted, with gross assets of no more than £30 million and fewer than 250 employees) can grant options over a maximum of £3 million worth of shares at any one time.

The options are normally free from income tax and national insurance charges when they’re granted and exercised. Certain trades are excluded from EMI options, taking into account Company Share Option Plan (CSOP) options also granted to them, with a total market value of more than £120,000 at the date of the grant.

Other share schemes approved by HM Revenue & Customs

SAYE Linked Share Option Schemes (“Sharesave”)

Employees are granted options at a discount of up to 20% at the start of the savings contract. Monthly amounts of between £5 and £250 for up to five years are deducted from pay, under a certified save as you earn (SAYE) contract with a bank or building society.

At the end of the savings contract, a tax-free bonus is payable. Employees use the proceeds of the savings contract, including the bonus, if they want to exercise the option, normally after three, five or seven years. If they do not, the proceeds are repaid in cash, tax-free. There is no tax or national insurance charged on the discount or on the gain made when the option is exercised.

Company Share Option Plan (CSOP) schemes

Employees are granted options to acquire shares at the market price at the time of the grant. These can be worth up to £30,000 at any one time. There’s no tax or national insurance to pay on the gain made when the option is exercised, as long as the options are held for at least three years – unless participation ends through disability, redundancy or retirement.

Unapproved schemes

These are subject to the general rules that employees have to pay income tax under Schedule E, and national insurance when they exercise a share option because of their employment (that is, they receive shares free or cheaply).

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