Employee share schemes

Some employers offer company shares to their employees, often as part of an overall benefits package. Certain employee share schemes can also provide tax advantages.

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What is an employee share scheme?

There are various types of employee share schemes but in general these consist of options for employees to purchase company shares at a fixed price or the market value when the options were granted. In some cases the company may offer shares for free, as an incentive.

What are the main types of scheme and how do they work?

The main types of scheme - and the only ones which provide tax advantages - are as follows:

Share Incentive Plans (SIPs)

This involves keeping shares in a plan for at least five years to avoid paying income tax or national insurance on their value. These types of shares can be obtained in several ways:

  • For free - £3,600 of free shares in any tax year can be given to an employee
  • Partnership shares - buying shares out of salary before tax deductions, up to the lower of £1,800 or 10% of income for the tax year
  • Matching shares - employers can provide up to two free matching shares for each partnership share purchased
  • Dividend shares - additional shares can be purchased with the dividends from free, partnership or matching shares

Save As You Earn (SAYE)

Up to £500 can be saved each month in a savings contract which lasts three or five years. At the end of this period, shares can be purchased for a fixed price. No tax needs to be paid on the interest in savings - and any profit on the difference of the share value is free from income tax and national insurance.

Company share option plan

This provides an option to purchase up to £30,000 worth of company shares, without any income tax or national insurance due on any difference in the value.

Enterprise Management Incentives (EMIs)

Companies with assets of £30 million or less (subject to certain exclusions) can grant options up to the value of £250,000 in a three year period. No income tax or national insurance needs to be paid if the shares are purchased for at least the market value they had when the option was granted.

What is an employee shareholder?

Employee shareholders work under a specific type of employment contract, known as an employee shareholder employment contract. Shares with a minimum value of £2,000 (upon receipt) must be given by the company to each employee working under this contract. In return, certain employment rights have to be given up by the employees.

In order to become an employee shareholder the following conditions must be met:

  • Both parties must agree that the employee will be an employee shareholder
  • The employee must be given fully paid up shares worth at least £2,000
  • No payment should be made for these shares
  • The employee should be provided with a written statement of the particulars of their status
  • The employee must receive independent professional advice on the terms - to be paid for by the employer. They cannot agree to the contract until at least seven days have passed following receipt of the advice.

There used to be tax advantages for this type of contract but these have since been abolished by the government.

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