Employee Share Schemes

Posted on: 15 April 2008 by Gareth Hargreaves

Find out how to help yourself to tax savings by investing in your workplace.

An increasing number of companies offer employees shares under various schemes so they can gain from the firm's city success. However, stocks can fall as well as rise and you could suffer along with investors if the stock price falls.

Company Employees Only

This information only applies to employees in companies - if you work for a partnership, charity, a not-for-profit company, the government, a local authority, the NHS or a trust, then this is not for you.

Many share schemes have tax and national insurance benefits and are known as approved schemes. These include plans such as Save As You Earn (SAYE), Share Incentive Plan (SIP), Company Share Option Plan (CSOP) or Enterprise Management Incentives (EMI).

SAYE is the most widespread scheme. The Share Incentive Plan is also used by a number of companies but most of the other schemes and those that are taxable - known as unapproved schemes - tend to be mainly used by small companies or as complex methods of executive remuneration.

Save As You Earn

This is offered by a large number of public companies including many in the FTSE 100 index - although there is no obligation on any employer to have a scheme or on an employee to join.

SAYE combines tax benefits with a 'can't lose' guarantee.

SAYE is the most popular because it combines tax benefits with a 'can't lose' guarantee. If your company's shares rise over the life of the SAYE contract, you can profit. But if they fall, you can walk away from the deal with some interest on your money.

The plan has to be open to all employees, irrespective of status, salary or whether they are full or part-time. But companies can impose a qualification period of up to five years' service.

SAYE: A Savings Contract For A Fixed Period

If you join, you contract to pay in a monthly sum from £5 to £250 into the plan. You agree to pay for three or five years - those that opt for five years can leave the money for a further two years, making seven years, although it is up to the company to say which time periods will be allowed. You cannot increase your payment once you start.

The money you save in SAYE goes into a savings account selected by your company where it grows tax free.

When the plan starts, the company will announce the value of each share for the SAYE. This can be set anywhere between the stock market value on that day and 20 per cent below that.

Many companies start a new scheme each year so you could add to your original payment, providing your total does not top £250 a month. If you decrease your payment into the scheme, it counts as stopping, which ends the scheme for you. You can, however, miss up to six payments during the contract period, which then extends the length of your contract.

The money you save goes into a special bank or building society account selected by your company. This cash grows with tax-free interest followed by a tax-free bonus at the end of the period. During the saving contract you do not buy shares and the interest rates vary from time to time. If you stop within the first year, there is no interest, while if you stop short of your contracted time, the interest rate is very low.

If you sell the shares, you will be liable for CGT on the gap between what you receive for them and the price you contracted to pay for them, which is known as the option price. But provided this profit is less than the annual CGT exemption, you will pay no tax.

Your contract ends if you leave the company - but you can continue if leaving the firm is due to illness, retirement or redundancy. If you die, your family can take over your contract.

What You Do When Your Contract Matures

At the end of the contract, you compare the price of the shares with the starting price, If it has gone up, you turn the savings into shares (which you can sell whenever you want). The gain in the share price is not taxable as income. If it has fallen, you just walk away from the deal, taking your cash plus the tax-free interest.

Share Incentive Plan

With a share incentive plan, the risks are greater. You actually acquire the shares, unlike SAYE where you have a contract to purchase them in the future from which you can walk away if it does not work out. S0 you will have to live with the ups and downs of share values.

Shares can be given free by your employer or you may have to pay for some, But even if you buy them yourself, they come from money that is free from income tax and national insurance and there is no CGT charge if shares are sold immediately after removal from a plan. However, you don't actually own the shares when you acquire them. Instead, they are held by trustees in a special plan for three to five years, depending on the specifics of each scheme.

Free Shares

Employers can put up to £3,000-worth in any tax year into the trust scheme on your behalf. They must be available to all employees, including part-timers, but there can be a qualification period of up to 18 months. Free shares can be given in line with performance targets, length of service or salary level.

Partnership Shares

These are shares you buy with your own untaxed money. You are limited to £1,500 (or 10 per cent of your gross salary less pension and charitable contributions if that is lower). Because of the tax and national insurance freedom, a £1,500 purchase is worth a discount of almost £500 for basic-rate payers and nearly £615 for higher-rate payers - the £1,500 paid as salary to a basic-rate payer would end up at around £1,000. You have to hold the shares in the trust for five years to keep the tax benefits.

Matching Shares

Companies can (but don't have to) give up to two free shares for each partnership share you buy. This is an alternative to free shares. So you could get up to £3,000 in tax-free benefits.

Share Dividends

Dividends are taxable when they are paid in cash. But if the dividends are re-invested in the scheme (up to a £1,500-a-year limit), then the money is not taxed. This can continue as long as you hold shares within the plan.

Non-Approved Schemes

If you are not sure a scheme is approved, ask your employer.

With non-approved schemes, the value of the shares you receive is taxed as additional income. Where you pay a reduced sum for the shares, you are taxed on the difference between this and their market value. This charge applies to other investments like loan stock, bonds, unit trusts and futures. Non-approved schemes are mainly used to incentivise and remunerate key employees in small companies.

Further Information

Information on these schemes can be found in HMRC helpsheet IR287 'Employee share and security schemes and capital gains tax' and online at www.hmrc.gov.uk/shareschemes.

Which? Essential Guides Tax Handbook 2008/09This extract is taken from Which? Essential Guides Tax Handbook 2008/09.

The Tax Handbook, a Which? essential guide, by Tony Levene, can be ordered on 01903 828557 (£10.99, p&p free) or at www.which.co.uk/books or bought from bookshops, or online at Amazon.

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