Employee share schemes: Retaining and rewarding through tax-advantaged plans

Employee share schemes have become increasingly popular over the last few years, particularly with start-ups, scale-ups and tech companies. 

They are widely recognised as effective tools to attract, retain and motivate your employees. 

The schemes available provide opportunities to give their employees a stake in the company, making them feel as though they own a part of the company they work for and are more aligned with the company’s goals. 

With benefits such as compensating for lower salaries, helping attract new talent and relieving that pressure on your cash flow, employee share schemes could be a great asset to your company. 

“Employee share schemes offer a number of potential tax savings, but more importantly they can be a great way of encouraging employee buy-in to create a productive and committed work culture,” said Abdul Kadir, Tax Director at Richard Anthony. 

There are several options when it comes to tax-advantaged schemes in the UK, so let’s take a look at them. 

Save As You Earn scheme (SAYE) 

The SAYE scheme allows employees to buy shares with their savings for a fixed price. 

The scheme sets out a contract of between three and five years and will let employees save up to £500 a month during that period.  

Once the contract ends, employees can use whatever money they have saved to buy shares.  

If the share price has increased at the end of the contract, employees can purchase shares at a discounted rate and potentially sell them at a profit.  

If the share price has decreased, employees have the option to decline purchasing shares and instead receive their savings along with any accrued interest as a tax-free lump sum to spend on whatever they want.  

The best part is any interest earned on the savings grows tax-free, and employees won’t face Income Tax or National Insurance on any gains from buying shares below their market value. 

Abdul says, “The SAYE scheme not only empowers employees to invest in the company’s success but also offers a unique opportunity to benefit from market fluctuations.   

“It’s a win-win scenario for employees, they’ll either potentially be able to seize a profit or walk away with a tax-free lump sum.” 

Enterprise Management Incentives (EMIs) 

For employees who work for a company that is valued at less than £30 million, there is an opportunity to participate in EMIs. 

This scheme offers employees share options worth up to £250,000 over three years.  

Unlike the SAYE scheme, if shares are bought at a discounted rate, then they may be subject to taxation.  

If it’s bought at the market value of the shares at the time the options were granted, then no Income Tax or NI will be required to pay. 

Unfortunately, EMIs aren’t available for all business types. Organisations like property development, banking and farming will have to look for an alternative scheme even if they do fall under the £30 million threshold. 

Share Incentive Plans (SIPs) 

Employees can receive shares valued up to £3,600 annually, and as long as these shares are held in the SIP plan for five years, they will be exempt from Income Tax and National Insurance (NI) on their worth. 

On top of receiving up to £3,600 worth of free shares annually, employees can also choose to buy shares directly from their salary before taxes are deducted.  

They can allocate an amount equivalent to £1,800 or 10 per cent of their income, whichever is lower, towards purchasing shares.  

Additionally, employers have the option to award up to two free matching shares for each share that employees buy through this program. 

If the company’s policy allows, employees can potentially use dividends from shares acquired through a SIP to buy more shares. Income Tax on these dividend shares can be avoided if they are held for at least three years. 

Abdul points out: “SIPs are often the share plan of choice for employers. They are typically pretty flexible and straightforward to operate.” 

Company Share Option Plan (CSOP) 

For organisations looking to introduce a CSOP, it’s essential to register the scheme and ensure it meets HM Revenue & Customs (HMRC) requirements. 

Under a CSOP, employers can offer employees options to buy up to £60,000 worth of shares at the current market value when the options are granted.  

There’s no Income Tax or NI on any gain from the difference between what you pay for the shares and their actual value, provided the exercise occurs between three and ten years from the grant date.  

When employees sell the shares, they may be liable for Capital Gains Tax. 

Can you transfer shares into an ISA? 

Yes. If an employee has acquired shares using either a SAYE or SIP scheme, then they can transfer up to £20,000 of these shares into an ISA. 

To be eligible for this, employees need to transfer the shares to their ISA within 90 days of acquiring them through the scheme. 

Abdul says, “These schemes aren’t just about saving money; they’re about showing your team they’re valued.  

“With options like SAYE schemes, you’re not only giving tax benefits but also boosting morale and making your company a more attractive place to work.” 

If you have any questions about any of these employee share schemes or are interested in registering your business for one, get in touch with our team today 

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