Employers love employee share schemes. They help them attract the best talent and can be extremely tax efficient for employees.
In the current tax rate environment, where salary/bonuses are taxed on employees at up to 47% or 49% for Scottish rate taxpayers (including employee national insurance contributions of 2%), tax-efficient remuneration is very attractive. What’s more, if you participate and the company grows you can share in that success.
However, share schemes can have some downsides. So, if you’ve been offered a share scheme and would like guidance on what that means for you, you should seek legal advice and ensure you understand the short-term and long-term implications. It can also be important to develop an understanding of any specific provisions or supporting documentation such as the articles of association or shareholders agreements.
In this article, we look at the types of schemes available, their tax implications, as well as other important factors to consider.
Jump to:
- What are the various types of employee share schemes?
- What are the tax implications of the HMRC tax-advantaged schemes?
- How much can you save, and how much can you buy?
- When can you exercise options?
- Are there any restrictions?
- What happens if you want to leave the company?
- What happens on a corporate event?
- What else you need to think about
What are the various types of employee share schemes?
The most common scenario is that you’re given or invited to purchase shares on attractive terms. Sometimes the gift or purchase is structured through a share option. The scheme may also be designed to benefit from HMRC tax-advantaged status.
The UK tax-advantaged share schemes are:
- Enterprise management incentive (EMI). You have the option to buy shares or receive a gift of shares
- Company share option plans (CSOP). You have the option to buy shares
- Save-as-you-earn (SAYE). You make monthly contributions from your post-tax salary for a set number of years, after which time you can use the savings to buy shares
- Share incentive plans (SIP). You’re given or invited to purchase shares from your pre-tax salary
[Where these schemes are not suitable, your employer may offer you the opportunity to acquire ordinary shares or otherwise a special class of shares in the company which may be called growth shares or hurdle shares. These arrangements can be designed to reward you for the growth in value of the business at capital gains tax (CGT) rates which are currently more favourable than employment income rates.]
There are also long-term incentive and performance share plans. These are often awarded to senior executives at nil or nominal cost as part of a benefits package. There are also deferred bonus and share matching plans that are commonly used by listed companies.
For more information about the schemes see: What are employee share schemes and how do they work?
What are the tax implications of the HMRC tax-advantaged schemes?
CSOP
With a CSOP, you have the option to buy shares at an agreed price at grant.
If you exercise this option and make a gain because the shares have increased in value, you won’t pay income tax or NI on that gain.
You may have to pay capital gains tax (CGT) on sale particularly as the CGT annual exemption has reduced to £6,000 and is reducing further to £3,000 with effect from 6 April 2024. However, you may be able to mitigate CGT, for example by gifting shares to a spouse or civil partner, or through small sales, so that you realise gains within the annual exemption.
EMI
The tax benefits of EMI schemes are similar to CSOPs. Any gain at exercise is free of income tax and NI, provided you pay at least the market value of the shares at the time the option was granted.
If you paid less than the market value at grant, there will be an income tax charge and possibly an NI charge at exercise, depending on the circumstances in which you exercise your option.
Sometimes your employer is not obliged to account for income tax and NI at exercise, and you will need to report the taxable amount at exercise through your self-assessment tax return.
Shares acquired through the exercise of EMI options can also provide favourable tax treatment for CGT purposes.
SAYE
SAYE is, in effect, a savings plan with tax benefits. You can put anything between £5 and £500 from your post-tax salary every month into the share plan, and after three or five years reclaim the pot or use it to buy your employer’s shares at a fixed price.
Your employer will set the minimum and maximum contributions allowed, and the share purchase price. This can be up to 20% less than the value of the shares when the plan is set up.
The benefits of SAYE are as follows:
- If the shares have gone up in value since the start of the plan, you can get a real bargain as you only have to pay the fixed price agreed at the start
- If the shares have gone down in value, you can get your savings back and for savings plans taken out after 18 August 2023 with interest (earlier plans do not pay interest)
- Any interest or bonus you get at the end of the scheme, as well as any gains you make because the shares are worth more than you paid for them, are free of income tax and NI
You may need to pay CGT on your gains when you sell the shares, but you can transfer your shares into an ISA or self-invested pension plan to avoid CGT on sale.
SIP
With a SIP, you’re given or invited to buy shares in your employer’s company that are then held in a trust. After five years, you can sell them from the plan without attracting CGT, and you won’t pay any tax or NI on the shares.
However, if you take them out of the plan before five years, depending on the circumstances, you may pay income tax and sometimes NI on the shares.
If your shares increase in value outside the plan, you will be liable to CGT on the gain.
How much can you save, and how much can you buy?
With SAYE, you can save anywhere from £5 to £500 per month, depending on the amount set by your employer and described in the plan. You can buy shares up to the value of your pot at the time of purchase.
With CSOP, you can buy up to £60,000 of shares at the fixed price (until 5 April, the limit was £30,000).
EMIs allow you to buy up to £250,000 of shares (based on the market value at the date of grant) in any three-year period.
SIPs work as follows:
- You’re given free shares. You can get up to £3,600 of these in any tax year
- You buy ‘partnership’ shares. You can buy up to £1,800 (or if lower, 10% of your annual salary) of shares from your pre-tax salary
- You get ‘matching’ shares worth up to an additional £3,600, where you get up to two free shares for every partnership share you buy
- You buy ‘dividend’ shares. You can buy shares out of the dividends you receive from your partnership, matching or free shares
When can you exercise options?
To qualify for tax benefits under a CSOP, you must usually exercise your options between three and ten years after you’re granted them.
With EMIs, you must exercise the options before ten years are up.
Are there any restrictions?
There are some restrictions to the plans, and these are described in detail on the government website.
To summarise:
- For CSOPs, not all employees may be invited to join the plan. Also, your employer may make exercise of the option conditional on your meeting performance targets.
- EMI plans can be tied to performance targets, and if you’re a part-timer you may not qualify.
- With SIPs, free shares may be subject to performance conditions (although this is not common). Buying shares may affect your entitlement to benefits.
All tax-advantaged plans are subject to certain tax restrictions.
What happens if you want to leave the company?
Each employer will lay down rules in its plan that describe what happens if you leave the company. Find out more in our article where we take a look at leaver provisions, why it’s important to understand them, and how they work.
In the case of SAYE, you should be able to take out the money you’ve saved.
As a general rule, tax reliefs may be restricted for leavers, subject to exceptions for involuntary or good leavers.
What happens on a corporate event?
The rules of the plan will lay out what happens on a corporate event. There is also some more information in our article on how employee shares are affected by a company sale.
What else you need to think about
The type of share scheme you’re offered and its exact terms will be up to your employer. If you work for an SME, they’ll most likely set up an EMI or possibly a CSOP scheme, as these allow employers to choose who they offer shares to. With SAYEs and SIPs, the schemes must be open to all staff, and they suit larger companies whose shares are listed on the stock exchange.
In terms of tax advantages and amounts on offer, an EMI scheme is probably the most generous scheme, so if you’re at management level this is the best one to go for.
Your employer may set up a share scheme that has no particular tax benefits, and these are known as non-tax-advantaged schemes. They may, however, prove valuable and offer shares at a good price. Non-tax advantaged share plans allow employers to provide their employees with the opportunity to buy company shares in the future, locking in an agreed-upon pre-set price, ideally capitalising on potential value growth upon exit.
One final thing to think about is that share ownership isn’t for everyone, and shares can go down in value as well as up. You should also be careful not to rely too much on employer shares as part of your investment portfolio and diversify into other assets too.
If you’ve contributed to a SAYE and your employer goes belly-up, you can lose your pot, although the government does provide a guarantee of up to £85,000 per person. In addition, whilst for new contracts taken out from 18 August 2023, there is interest or a bonus payable to you on your savings, you may get a better rate if you put your money elsewhere.
