UK – Employee Share Ownership Plans & Types
Employee share schemes are widespread in private companies and public companies and have grown exponentially to nearly 80% of FTSE 100 companies and over two million UK employees holding shares or options through a tax-advantaged schemes. Companies and employees can avail of certain share plans from their company that may be ‘tax free’ or ‘tax efficient’ to both, details can be found from the HM Revenue & Customs (MHRC) “Employee Shares and Securities Unit”.
Employee share ownership is not limited to public or listed companies. Private companies and unlisted companies can offer a plan, but employee ownership does not usually exceed 10 percent. A company is commonly referred to as employee-owned when employees own a significant stake (usually 25% or more) in their company, as this gives them a blocking vote under company law.
In particular, schemes offer a variety of advantages as follows:
- A cost-effective way to reward & motivate key members of staff. Giving employees a stake hold in a business is more efficient and less expensive than monetary bonuses or pay rises.
- Effective employee retention, by giving deferred rewards the business can encourage loyalty and increase productivity amongst employees.
- To get employees to act like business owners make them business owners – involving employees is a proven way to increase the success and performance of a business.
- Employees and employers can make significant tax savings depending on the type of scheme.
- The setup and operating costs of share schemes are deductible for corporation tax purposes. Currently (2015) employer national insurance (NIC) is saved on share-based benefits though employee NI may be payable.
- There can be significant advantages of offering shares as remuneration in a ‘bear’ market giving employees scope for greater returns as the economy improves.
- Share schemes can set the groundwork for business exit strategy.
- Company Share Option Plan (CSOP)
- Enterprise Management Initiatives (EMI)
- “Save As You Earn” Share Schemes (SAYE or Sharesave)
- Share Inventive Plan (SIP)
Shares acquired under these schemes are generally free from income tax and National Insurance contributions.
Shares and options acquired other than through one of the above are commonly referred to as ‘unapproved’ or ‘taxed’ schemes’. What this means is that neither the employee nor the employer benefit from any income tax or National Insurance advantages and the schemes do not require HMRC approval.
Overview of employee share plan types
Company Share Option Plan – CSOP Overview
The business company can select the employees and directors (who own less than 30% of the company) that can participate in the plan and grants them options to purchase the company’s shares in the future at a price set on the date of grant. The plan has to be approved by HMRC.
There is no charge to income tax if the option is exercised in accordance with the provisions of the scheme. Generally participant can only be granted approved options up to a value of more than £30,000 calculated at the date of grant.
CSOP Tax relief
The rules may change so check current rules with HMRC – but as a guideline:
Grants are not liable to income tax. Income tax may not be due on the increase in value of the shares between grant of the option at exercise if the scheme is HMRC approved and the exercise is between 3 and 10 years from the grant and the rules of the scheme are met. After 10 years the exercise can be subject to capital gains tax (CGT) with certain rules and annual exemptions.
Members exercising before 3 years may be subject to income tax though certain exemptions apply for disability, redundancy, retirement, takeover, etc. referred to as “Good Leavers”.
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Approved SAYE share option schemes: Schedule 3 SAYE option scheme
These are all-employee schemes: all qualifying employees and directors must be eligible to join on similar terms provided a qualifying period of up to 5 years employment has been met. The company grants options to buy shares in 3 or 5 year’s time at the market value on the date of grant or at a discount of up to 20% of that market value.
Participants enter a savings contract known as a certified SAYE savings arrangement to buy the shares at the end of a fixed term. If they do not buy shares the participant may withdraw the savings (including any tax free interest due) and use the proceeds as they wish. Payments are made on a regular basis from salary or wages between £5 and £500. The number of monthly contributions must be between 36 and 60. The scheme must be approved by HMRC and is then know as a Schedule 3 SAYE option scheme.
The rules may change so check current rules with HMRC – but as a guidline:
Income tax is not due when an option is granted. Participants will not normally be taxed when the proceeds of the savings contract are used to exercise the option. An income tax liability does arise where the option is exercised within three years of the date of grant because of a take-over or because the business unit in which participants work has been sold.
The base cost for capital gains tax purposes is the same as for the CSOP.
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Enterprise Management Initiatives (EMI)
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Share Inventive Plan (SIP)
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The acquisition of shares and securities in connection with an employment other than through one of the above schemes are commonly referred to as ‘unapproved’ or ‘taxed’ schemes’. What this means is that neither the employee nor the employer benefit from any income tax or National Insurance advantages and the schemes do not require HMRC approval.