Have you considered an employee share scheme as a way to reward staff? Why would you consider setting up a share scheme?
The main benefits of setting up a share scheme would be that shares may be awarded as remuneration for employees services, therefore employees may be paid bonuses in share form. This would then act as a performance incentive, as the higher the value of the shares the higher the additional profits the employee will receive.
Another important benefit of setting up a share scheme would be for the retention of staff. The majority of share schemes require the employee to have been with the company for a minimum period of three years before they can exercise the option to acquire shares.
There are various types of share incentive schemes and share option schemes currently available to consider. Below I will briefly outline four types of tax advantage share schemes.
1. Share Incentive Plans (SIPs)
A SIP is usually operated by a quoted UK company. The company will created a trust in which money is placed; the trustees will use this money to acquire shares. The trustees will then reward the acquired shares to the employees in the plan. At this point the shares remain property of the trust, they are simply allocate to the employees until the employees wish to withdraw them from the plan.
An employee can receive up to £3,600.00 of free shares per annum. This reward can be based on performance throughout the year; the shares would usually remain in the plan for a minimum period of three years.
The SIP also enables employees to purchase new shares and obtain income tax relief on the purchase. Shares purchased in this way are known as Partnership Shares.
If the employee does not withdraw the shares from the plan within five years from the date they were originally rewarded, no income tax or national insurance will be charged on the withdrawal amount.
All employees must be invited to join the scheme.
2. Savings related share option scheme
Savings related share option schemes are extremely easy to create and administer. An employee will make regular payments into a designated building society account throughout a selected contract period. This is known as an SAYE- a Save as you earn- account.
At the end of the selected period usually between 3 and 5 years, the employee will use the cash saved to purchase shares in the employer company. The price of these shares will have been fixed at the start of the contract.
No tax will be charged on the exercise of the shares.
All employees must be invited to join the scheme, however employees with less than five years’ service can be excluded.
3. Company share option plans (CSOP)
The company would grant the employee the right to acquire ordinary shares at a fixed price within a specific period of time. The price at which the shares are granted, must not be less than the market value of the shares at that time.
Employees will not be given free shares, the employee is simply taking up an offer to buy the shares at a specified price.
No income tax or NICs will be charged, if the option is exercised within 3 to 10 years of the date it was originally granted.
An attraction to a company share option plan is that the company can invite selected full time directors and full time or part time employees to participate.
4. Enterprise management Incentives (EMI)
EMI options are great for smaller companies to attract and retain their staff. The employee will be granted the right to acquire shares within the next 10 years at a fixed price. Within the next 10 years the employee will exercise the option to buy shares.
For a company to qualify it must have less than 250 full time employees and be permanently established in the UK.
If the option is granted within 10 years, income tax will only be chargeable if the shares were originally offered at a discount. After 10 years no income tax is chargeable on exercise of the shares.
The company can invite selected, full time employees to join the scheme.
For further guidance and advice, contact Holly on 01909 512 120 or firstname.lastname@example.org