The tax advantages of Irish employee share plans for employees and employers
Attracting and retaining key employees is one of the biggest challenges facing companies in Ireland today.
Businesses look to meet this challenge in many ways, offering various perks and incentives, such as pensions, flexitime, private healthcare plans, and well-being in the workplace programmes.
Another – and potentially highly effective – way of attracting and then holding on to top performers is to offer them share options and/or direct share awards. Evidence shows that employee share schemes correlate positively with increased engagement, improved performance, greater commitment, and higher levels of retention, all of which will add either directly or indirectly to the bottom line. This point alone means companies should investigate how encouraging employee share ownership can impact on their business.
The tax implications for Employee Ownership in Ireland
Compared to our European neighbours, Ireland has been relatively slow to embrace share-based incentive programmes for employees, but Government legislation and Revenue rule changes have encouraged movement in this direction in recent years, with further expansion likely in the future.
That being the case, companies who have yet to do so should take the time to look at the choices available to them and identify whatever plan or combination of plans may best suit their needs. One of the key points that companies will look at when examining employee share ownership schemes is that of taxation. Specifically, you will want to be clear on the tax implications of going with a particular plan for you as an employer, but also for employees. Whatever scheme you settle on will need to work for both parties – you will want to go with a plan that promises attractive tax breaks at company level, but it will also need to offer the prospect of tangible savings for employees, otherwise you will struggle to achieve the desired take-up levels.
While how employee share ownership schemes are taxed is a key consideration, this constitutes just one piece of a larger jigsaw. You also need to be clear on the specific rules and details of the various schemes; once armed with that information, and clear on the taxation arrangements, you can then make an informed decision around what plan or plans will be the best fit for you.
How Revenue-approved employee share schemes are taxed in Ireland
Revenue-approved employee share schemes tend to be treated most generously, from the taxation perspective. Under current Revenue rules, there are two such plans available to companies: Approved Profit-Sharing Schemes (APSS) and savings-related share option schemes, also known as Save As You Earn (SAYE).
How APSS are taxed in Ireland
An APSS is best regarded as a more tax-efficient alternative to a cash bonus payment. For the recipient, a cash bonus will be liable to income tax (40%), as well as Pay-Related Social Insurance (PRSI) and the Universal Social Charge (USC). By the time the bonus actually reaches the employee, more than half the gross amount will have been deducted.
With an APSS, an employer can assign shares to the value of €12,700 per annum to an individual employee. If those shares are left in a trustee account for at least three years, then no income tax will fall due. At that point, the employee can appropriate those shares and only be liable for PRSI and USC, relatively minor deductions, certainly compared to what happens with a cash bonus. Beyond that, if the shares are subsequently sold, Capital Gains Tax (CGT) will be levied, but only on the difference between the share price at appropriation and on the sale date.
The company will be eligible for a tax deduction arising from setting up and maintaining the scheme, while also saving 11.05% on employer PRSI.
All employees with three or more years of service must be deemed eligible for this scheme, while it is up to the company to decide whether or not to include personnel who have been on the payroll for less time.
How SAYE are taxed in Ireland
Participants in an SAYE scheme enter into a savings contract, with that document setting out key information around how long the plan will last, the contributions made by participants (typically from €12 to €500 per month), and the financial institution that will hold the savings.
At the outset, participant agree to have a fixed amount of their net salary moved to a qualified savings account every month for the duration of the plan, and the company assigns options to those individuals, based on the respective amounts being saved, usually with a discount on the price-per-share.
At the end of the agreed period – three or five years – participants can use their accumulated savings to exercise some or all of their options, or have their savings returned as a lump sum.
On taxation, as the contributions are taken from net pay, no additional deductions will be made in the event of the savings being withdrawn. If the options are exercised, participants will be liable for PRSI and USC, but only on the difference between the option price and market value of shares at that moment, assuming the share price has increased over time. If the shares are subsequently sold, then CGT may become due, but only on the profit and this figure – barring a major windfall – may fall within the exemption level for the calendar year, so it is possible that no payment will be made.
For the company, no PRSI contribution will become due and the costs associated with setting up the scheme will be tax deductible.
As with an APSS, all employees who meet the inclusion criteria must be offered the chance to participate. Time served is a common point around which to peg eligibility, with employers allowed to specify three years unbroken service as the cut-off point.
How unapproved employee share schemes are taxed in Ireland
Aside from the two Revenue-approved schemes, companies can also examine other possibilities when looking to introduce an employee share ownership plan. Unapproved schemes help to provide the flexibility that some companies need. For example, APSS and SAYE schemes must be offered on an all-employee basis, subject to eligibility rules. By contrast, unapproved share option schemes will generally allow companies to pick and choose personnel, which may mean inviting large numbers of staff, but in practice will usually mean targeting key employees and directors. For some companies, this flexibility may be deemed to be more important than the greater tax-related attractions associated with approved schemes.
From the taxation perspective, unapproved schemes tend to be categorised into two groups – short options and long options, with the former referring to schemes in which options must be exercised within seven years, and the latter to schemes in which no such restriction applies.
Whereas no income tax is levied on short options at the point that they are received, for long options – when the scheme will last for more than seven years – Revenue reserves the right to levy a charge, based on the difference between the option price and the market price, assuming the market price is higher when the options are granted. For that reason, most companies prefer to offer short options.
With short options, there is no tax on the grant, but participants will be liable for tax when the options are exercised. At that point, income tax, PRSI, and USC will all be applied on the difference between the option price and the market price at the time of exercise, assuming a gain has been made, and must be paid within 30 days.
Participants will also be liable for CGT on whatever profit they make when they sell their shares.
For the employer, aside from being able to pick-and-choose participants, another key attraction of an unapproved share option scheme is that they make no PRSI contribution.
Among the other schemes available to Ireland-based companies are:
Key Employee Engagement Programme (KEEP): Introduced in 2018, KEEP is a share options scheme specifically designed to assist SMEs in tackling issues around skills shortages and staff retention.
The terms of the programme allow employers to award a bonus incentive to employees that is exempt from income tax, PRSI, and USC. The only tax liability is CGT, which will be applied after options are exercised and
The KEEP scheme applies to share options granted from January 1, 2018 to December 31, 2023.
Options cannot be exercised within 12 months of being granted, but also cannot be held for more than 10 years. This 10-year window means that the terms of the scheme may continue to apply to active options up
to the end of 2033.
Only businesses with less than 250 employees and a turnover of no more than €50 million are eligible.
The company becomes eligible for tax relief arising from this scheme when the expressed main purpose for running it is to recruit new or retain existing employees.
Clog schemes: Restricted shares are free shares given by a company to selected employees which must be retained for a specified period. This period – at least one year – is referred to as the “clog” period.
The shares are offered as a bonus and the scheme offers a more tax-efficient alternative – for employer and employee alike – to a cash payment.
Because the shares are restricted and participants must retain them for the specified period, lower initial income tax, USC, and PRSI liabilities will apply. The extent of the tax reduction will be linked to the number of years participants must hold the shares before being able to sell them. There is a 10% abatement for every year of restriction. When shares are finally disposed, that transaction may be subject to CGT, depending upon the specifics of the plan.
Companies make no PRSI contribution and can claim a tax deduction on the costs associated with setting up and running the scheme.
Phantom schemes: A Phantom share option scheme delivers cash bonuses as opposed to shares, but the size of the bonus will be linked to the company’s share value.
In practice, participants receive options for notional shares – known as phantom units – with a view towards securing cash payments down the line based on positive movement in the value of the company’s shares above and beyond the base price set at the outset. The base price will usually be the market value of the shares at the point that the options are granted.
On tax, the employee will have to pay income tax, PRSI, and USC upon receipt of the bonus while the company may be liable for employer’s PRSI because they are making a cash payment. A key difference, though, is that since no shares are involved, there will be no CGT.
Share awards: Whereas with a shares option scheme, employees are offered options to buy shares at a set price at a predetermined point in the future, with share awards, the company gives employees free or discounted shares, with these awards usually linked to performance targets and/or at a set future date.
Free shares can be granted either as a once-off or as part of a formal plan. Whichever approach is followed, they are regarded as a benefit-in-kind by Revenue, with the value of that benefit being the market value of the shares at the point that they come into the possession of the employee – whether handed over immediately or after a vesting period.
Discounted shares can also be offered to employees.
Income tax, USC, and PRSI comes into play in both scenarios. In the case of free shares, the tax liability is assessed based on the market value of the shares at the time you receive them, whereas for discounted shares you are taxed on the value of the discount. If/when the shares are sold on, the employee will be liable for CGT.
Recent guidance from Revenue provided updated information on electronic reporting responsibilities for some share-based remuneration. Affected types include restricted stock units, restricted shares, convertible shares, forfeitable shares, shares acquired at less than market value, restricted shares, and employee share purchase plans.
The electronic Employer’s Share Awards return (Form ESA) can be found on the Revenue website. Revenue first published information on this change in June 2021 and set out a filing deadline of August 31, 2021 for the tax year 2020. From 2022 onwards, the ESA will need to be returned by March 31.
There are many different share plans out there and companies need to educate themselves on which one or combination of plans will best suit their needs. Taxation is one of the key considerations when assessing the various possibilities, but companies must not lose sight of the fact that any plan they consider will need to be attractive to the key target market – your employees.