What are employee share schemes?

by | Jul 1, 2022

What are employee share schemes?

As an employer, there are many ways to reward your team for their hard work.  One of the most popular is the use of employee share schemes which allow you to provide incentives for your employees in a tax-efficient way.

If you’re unsure of these schemes or how to use them, this post will explain the finer details.

What is an employee share scheme?

An employee share scheme is a system where you can share company ownership with your employees.

You can distribute equity between certain staff members or the whole team if you wish. These schemes work for several reasons, such as retaining talented workers, attracting new ones or even providing an incentive to motivate your team.

There are several schemes to choose from, depending on the size of your business and how you want to reward your employees.

Types of employee share schemes

There are four main types of schemes, all approved by HMRC.

The enterprise management investive (EMI) scheme allows you to give your employees shares and offset the cost of employee tax benefits against your company’s tax liability. Smaller companies use these and choose to give them to some or all team members.

Tax from an EMI is charged at the value of the shares when they’re rewarded. Capital gains tax (CGT) is applied at a lower rate of 10% as long as the shares aren’t sold within two years of the grant.

Company share option plans (CSOPs) are slightly different as they must be granted at market value. Any gain made by the employee is only exempt from income tax if the shares are held for at least three years. Like the EMI, you can decide how many employees receive the shares.

Save as you earn (SAYE) and share incentive plans (SIPs) schemes must be company-wide, with everyone being able to participate.

SAYE schemes allow employees to buy shares after a specific time, and they won’t have to pay income tax or NICs on any increase in value when the options are exercised.

A SIP scheme means shares can be given or bought and held in a trust by the employer. No tax or NICs are paid on shares, and no CGT will be paid on any increase in value.

Employee benefit trusts

An employee benefit trust (EBT) can hold shares for a company on behalf of its employees.

These trusts are managed by directors, employees or an independent body that looks after the shares with the employees’ best interests in mind.

An EBT can be used for the long-term holding of strategic shares on behalf of an employee. It can also be used to buy shares back from an employee who wishes to sell them or has to part with them due to leaving the company.

EBT payouts to beneficiaries are liable to income tax, CGT and inheritance tax.

(While employee share schemes have tax benefits for yourself and your employees, you must follow HMRC’s guidelines. Otherwise, you could be using them illegally).

Find out more

There are many benefits to making use of employee share schemes. The team at ABG is on hand to answer any questions you may have about the schemes and the related tax obligations.  Contact us today on 020 7330 0000.

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