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Employee Share Scheme UK Guide 2022

uk-share-plans-tax-implications

In the US, there’s a tax-advantaged employee stock purchase plan (ESPP) under which employees can purchase stock in their companies at a discount and enjoy tax benefits.

In the UK, we have employee share schemes for companies to offset costs and reward employees flexibly. Like ESPP tax treatment, these UK schemes allow participants to pay lower (often significantly lower) rates of tax than they would compare to ordinary income.

In this article, we’ll cover the following topics. Skip to the relevant section below:

What is an employee share scheme?

An employee share scheme is a way for employers to share company ownership with employees as part of their remuneration package. This can involve giving free shares or granting options to buy shares at an agreed price in the future.

It helps employers retain, recruit and incentivise employees. Employees can capitalize on the scheme to achieve their financial goals. Here’re the 4 HM Revenue and Customs (HMRC) approved tax-advantaged share schemes in the UK:

  • Enterprise Management Incentive (EMI): Employees are given an option to buy shares at an agreed purchase price after vesting
  • Company Share Option Plan (CSOP): Employees are given an option to buy shares at a non-discounted purchase price within 10 years of the grant
  • Save as you Earn (SAYE): Employees are given an option to buy shares at a discounted price OR simply take back all contributions after 3 or 5 years
  • Share Incentive Plan (SIP): Employees are given shares for free AND/OR can buy shares in the company

Besides offering tax benefits under ‘approved’ schemes, HMRC offer ‘Unapproved’ schemes which give a company more flexibility in what they can offer their talent but typically don’t come with the same tax benefits as approved ones.

Whether it's approved scheme or unapproved scheme, we’re here to help simplify your employee share plan management - from advising on the best form of enrolment for participants to trading, compliance, tax and everything in between.

How do employee share schemes work? (+ Tax events)

Here, we’ll focus on discussing the 4 HMRC approved share schemes and their tax implications. You can also skip to the scheme summary to view these 4 types of employee share schemes at a glance.

1. Enterprise Management Incentive (EMI)

An Enterprise management incentive scheme give a participant the option to buy up to £250,000 worth of shares at an agreed purchase price. Ideal for small companies having assets of £30 million or less.

Plan period: Typically held over 2 years before sale to enjoy a lower CGT rate*

Participants: Can invite selected employees only

Discount for purchasing shares: depending on scheme design

Limits: Employees can buy up to £250,000 worth of shares

Tax:
– Grant: No tax
– Exercise: No income tax if purchase price is equal or greater than AMV at grant
– Sale: CGT is taxed on the difference between the share value at sale and the cost used to exercise option. CGT of only 10%* will be due if at least 24 months have passed from the date of grant.
Corporation tax relief: The option gain (the difference between the initial share offering and the final price at vesting) and the scheme setup & administration costs

2. Company Share Option Plan (CSOP)

CSOPs give a participant the option to buy up to £30,000 worth of shares at a non-discounted purchase price.

Plan period: Typically held over 3 years before sale to enjoy more tax benefits

Participants: Can invite selected employees only

Discount for purchasing shares: No discount under CSOPs

Limits: Employees can buy up to £30,000 worth of shares

Tax:
Grant: No tax
Exercise: No income tax if shares held 3 years from grant date
Sale: CGT is taxed on the difference between the share value at sale and the cost used to exercise option
Corporation tax relief: The spread (the difference between the market value of the option shares on the date of exercise and the exercise price), and the scheme setup & administration costs

3. Save as you Earn (SAYE)

Under Save As You Earn, employees are granted the option (i.e. the right) to buy shares in the company at a future date at a discounted purchase price (i.e. exercise price), using their accumulated savings from their salary. When your plan ends, you’ll have 2 options: use your savings to buy shares OR take back all contributions.

Plan period: 3 or 5 years (depending on your savings contract)

Participants: Must invite all eligible employees

Contribution: Post-tax salary

Discount for purchasing shares: Up to 20%

Limit: Employees are able to contribute between £5 and £500 per month

Tax:
Grant: No tax
Exercise: No income tax if shares held for 3 years from grant date
Sale: CGT is taxed on the difference between the share value at sale and the savings amount invested into the plan
Corporation tax relief: The cost of setting up and administering the scheme.

4. Share Incentive Plan (SIP)

Share incentive plans work by keeping the shares awarded in a trust for employees until they either leave the job or decide to take the shares from the plan.

If you, as an employer, decide to set up a SIP, you can choose to offer your employees one or a combination of 4 ways to get the share: Free Shares (free to employees), Partnership Shares (paid by employees), Matching Shares (free to employees) and Dividend Shares.

Plan period: Typically held over 5 years before withdrawal to enjoy more tax benefits (possible to withdraw earlier)

Participants: Must invite all eligible employees

Contribution: Post tax salary (for partnership shares only)

Discount for purchasing shares: Up to employers (for partnership shares only)

Limits:
Free share: employers can give each employee shares worth up to £3,600
Partnership share: employees can use up to £1,800 to buy shares
Matching share: employers can give employees further shares at a ratio of up to 2:1 for each partnership share acquired

Tax:
Grant: No tax
Withdrawal: No income tax if shares held for 5 years. It’s possible to withdraw earlier and income tax will be chargeable. Learn more>>
Sale: CGT is taxed on the difference between the share value at sale and the value at the time of withdrawal
Corporation tax relief:The cost of setting up and administering the scheme.

Let us know which plan you’re looking to implement. If you’re already have one in place, we’re here to help simplify your employee share plan management.

Summary of the 4 HMRC approved share schemes

EMI
CSOP
SAYE
SIP
Participants
Can select certain employees for the plan
Can select certain employees for the plan
All employee plan
All employee plan
How it works?
Employees are given option to buy shares at agreed purchase price after vesting
Employees are given option to buy shares at non-discounted purchase price within 10 years of grant
Employees are given option to buy shares at discounted price OR simply take back all contributions after 3 or 5 years
Employees are given shares for free AND/OR can buy shares in the company
Contribution
NIL
NIL
Pay with post-tax salary
Pay with post-tax salary
Plan period
>2 years to enjoy tax benefits (possible to exercise earlier)
>3 years to enjoy tax benefits (possible to exercise earlier)
3 or 5 years
>5 years to enjoy tax benefits (possible to withdraw earlier)
Discount on purchase price
Up to employers
Typically no
Up to 20% off
Up to employers
Tax at Grant
No tax
No tax
No tax
No tax
Tax at Exercise / withdrawal
No tax at exercise if purchase price => AMV at grant
No tax at exercise (at least 3 years from grant date)
No tax at exercise (at least 3 years from grant date)
No tax at withdrawal if shares held for 5 years
Tax at Sale
CGT
CGT
CGT
CGT

How to defer or avoid CGT on employee share schemes?

There are 2 ways you can avoid Capital Gains Tax:

  1. Transfer shares worth up to £20,000^ into an Individual Savings Account (ISA) from a SIP, a SAYE scheme or an approved profit-sharing scheme within 90 days of the scheme ending or when you take out your shares. ISAs are CGT-free, this means there’s no CGT on any gains you make on your shares when you transfer the shares or eventually sell the shares. (^for tax year 2022/2023)
  2. Transfer shares into your pension scheme from a SIP or a SAYE scheme directly. Personal pensions are CGT-free, this means there’s no CGT when you transfer the shares or eventually sell the shares.

Employee share scheme benefits for employers

Enjoy tax benefits
When it comes to employee share plans, most of the tax breaks for companies are offsetting the cost of setting them up, smoothing that initial leap, and also covering any movements in the market during the period the share plan is running. These tax benefits limit, but do not entirely remove, the risk of employee ownership and market movements.

Attract & retain the best talent
These types of schemes help a company retain, recruit and incentivise employees by providing employees with financial incentives in addition to base salary and bonus.

Create ownership among employees
Employee owners generally have lower turnover and absenteeism, more company pride and loyalty and greater willingness to work hard, and make more suggestions to improve performance.

Employee share scheme benefits for employees

Build wealth
Issuing shares to employees helps improve financial wellbeing by providing lucrative financial incentives for their retirement. Or, they can be used to reach shorter-term goals, such as buying a car/home or paying for college.
Employees close to retirement and working at a company with an employer ownership plan had more than 10 times the median savings of employees nationally (Source: Rutgers study)

Enjoy tax benefits
Participating in tax-advantaged share schemes can reduce your tax burden because:
– No tax at grant
– No income tax at exercise if you meet the requirements
– Capital Gains Tax (CGT) can be avoided by transferring to an ISA or pension

So, are employee share schemes worth it?

The UK has long encouraged employee ownership through concrete, financial benefits; it’s up to all of us to take advantage of them.

Employees can take advantage of the tax benefits and any gain in value to make their life more financially healthy. For businesses, it’s a win-win to have happy employees who feel they’re rewarded for their work and also take advantage of the corporate tax relief.

From the graph below, SAYEs are the most popular scheme with the highest total value of options granted for the tax year ending 2020 at approximately £1.8 billion. SIPs and SAYEs each have the value of options granted at over £500 million. (Source: GOV.UK)

employee-share-schemes
Total value of options granted (shares awarded) by tax-advantaged schemes, tax year ending 2020 (Source: GOV.UK)

Employee share scheme administration

What is employee share scheme administration?

It is the process of creating and managing shares for employees in a company. The process involves everything from tracking and reporting changes in ownership to updating documents/policies/procedures, communicating with HMRC and stakeholders, consulting your board of directors, and staying compliant.

How can you do it?

Since there’re many administrative tasks and advanced knowledges involved, companies usually 1/Become experts themselves, 2/Hire experts or 3/Use software program to manage share plans for their organisation.

The first option is usually the most impractical one as everyone is busy and would rather spend the majority of time on their core business. The second and third options would make more sense to most companies.

How we can help

At Global Shares, with our award-winning software platform and dedicated team of over 300 equity professionals, we can cover everything, from advising on the best form of enrolment for participants to trading, compliance, tax and everything in between.

So, if you’re already convinced that a UK employee share scheme is right for you, speak to us today. Our experts will walk you through the following steps and help simplify your employee share plan management and administration.

If you want to explore how to make your UK employee share plan tax-efficient for both your company and your employees, get in touch with our experts. 

Please Note: This publication contains general information only and Global Shares is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. The Global Shares Academy is not a substitute for professional advice and should not be used as such. Global Shares does not assume any liability for reliance on the information provided herein.

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