There are two categories of schemes: HMRC-approved share schemes and unapproved share schemes.
The four HMRC-approved schemes are most commonly used since they provide tax advantages. They are:
Share Incentive Plans (SIPs)
This scheme keeps shares in a plan for at least five years to avoid paying income tax or national insurance on their value.
The shares are held by a trustee in a special purpose trust on behalf of the employees. Dividends paid into the trust can be used to purchase further shares or distributed amongst employees.
These types of shares can be obtained in several ways:
for free - £3,600 of free shares in any tax year can be given to an employee
partnership shares - buying shares out of salary before tax deductions, up to the lower of £1,800 or 10% of income for the tax year
matching shares - employers can provide up to two free matching shares for each partnership share purchased
No capital gains tax (CGT) is payable for selling the shares if they’re kept in the plan until they’re sold. However, if the shares are taken out of the plan before the sale, CGT may apply if their value increased.
SIPs must be implemented company-wide and corporation tax relief is available.
Save As You Earn (SAYE)
Up to £500 can be saved each month in a savings contract which lasts three or five years. The amount is taken from the employees’ salaries. At the end of this period, the savings can be:
No tax needs to be paid on the interest in savings - and any profit on the difference of the share value is free from income tax and national insurance. However, CGT may be payable for the sale of shares.
SAYEs must be approved by the HMRC in advance and must be implemented company-wide.
Company share option plan (CSOP)
This provides an option to purchase up to £30,000 worth of company shares without any income tax or national insurance due on any difference in the value. The option can be exercised between three and ten years after its grant. However, the subsequent sale of those shares will still be subject to CGT.
Companies can choose to apply the scheme to selected employees and specify conditions (eg performance targets) to be satisfied before the option can be exercised.
Similar to SAYE, approval from the HMRC must be sought in advance.
Enterprise Management Incentives (EMIs)
Companies with assets of £30 million or less (subject to certain exclusions) can grant options up to the value of £250,000 in a three-year period. No income tax or national insurance needs to be paid if the shares are purchased for at least the market value they had when the option was granted. However, if the employee sells their shares, CGT will be charged.
No tax is chargeable for the issuing or exercising of the option.
The option must be exercised within ten years and can be granted to selected employees.
It’s advisable to seek HMRC’s approval before implementing the scheme to ensure that all tax advantages are afforded. For more information, read Enterprise Management Incentives (EMI share scheme).
If you’re interested in implementing an employee share scheme, read Choosing the right employee share scheme.