08 Jun 2018
An employee share scheme often comes with a generous tax break to incentivise staff to invest in their employer's business. With the right profit sharing scheme, employees won't have to pay Income Tax or National Insurance (NI) on their shares. Now, let's go through each employee share option and see what it offers.
Share Incentive Plans (SIP)
When one of your staff has shares through a share incentive plan (SIP), they need to keep their shares within the plan for five years to not pay Income Tax or NI on their value. Since this criterion comes with a length of service requirement, this scheme can be a great way to convince your recruits to dedicate a lengthy period of their working life to your business. If a skilled employee has a stake, they're less likely to leave as long as you make sure they feel valued. Employees on an SIP won't have to pay any Capital Gains Tax on shares that they sell, as long as they retain the shares in their plan until the time they sell them. Taking the shares out, keeping them, and then selling them could lead to the employee having to pay Capital Gains Tax if the share value increases. There are four ways to acquire shares under an SIP:
- Free shares: An employer can give an employee as much as £3,000 of free shares in a tax year.
- Partnership shares: An employee can purchase shares out of their salary before tax deductions. The most an employee can spend per year is £1,800 or 10% of their income for the tax year—whichever is lower.
- Matching shares: An employer can grant an employee up to two free shares for each partnership share that an employee purchases.
- Dividend shares: The chance might be there for staff to buy more shares with any dividends they get from the other three shares. The employer's share scheme must allow this.
Your staff won't pay Income Tax if they keep their dividend shares for at least three years. If they take out any SIP shares early though, they'll need to pay Income Tax and National Insurance.
Save As You Earn (SAYE)
This is a very common employee share scheme. It's a savings-orientated share option scheme where staff can buy shares with their savings for a fixed price. They're able to save up to £500 per month under the scheme. Although this is the legal maximum, as an employer, you can set a lower limit. Some companies might cap it at £50 per month, for example. Once a savings contract is up, which is normally after three or five years, staff can buy shares in the business with their saved money. The advantages of an SAYE scheme are:
- Interest and any bonuses at the end of the scheme are free
- Staff don't pay Income Tax or NI on the difference between current share worth and what they originally paid.
However, if an employee sells their shares, they should expect to pay Capital Gains Tax.
The Company Share Option Plan
This is another common employee share scheme. It offers staff the chance to buy up to £30,000 worth of shares—at a fixed price. Employees won't pay Income Tax or NI on the difference between what they paid and the actual share value. But of course, if they sell the shares, they should expect to pay Capital Gains Tax.
Enterprise Management Incentive (EMI)
If your company holds assets of £30 million or less, you might be able to offer EMIs. You can grant your staff the option to buy shares up to the value of £25,000 in a 3-year period. If they buy their shares for the market value the shares held at the time of purchase, they don't pay Income Tax or NI. But staff will need to pay Income Tax and NI if they bought the shares at a discounted price. Once more, staff will likely pay Capital Gains Tax if they choose to sell their shares. Some companies can't offer EMIs, though. This is because they work in "excluded activities". These include:
- Property development
- Provision of legal services
Other schemes exist, too; however, they might not offer the same tax advantages.
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If you have any questions about employee share schemes, call our HR, employment law, and reward experts on 0808 145 3376.
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