RM2 > Resources > Useful Information > Employee Share Schemes and Tax

Tax jar on a shelf

Employee share schemes can be extremely tax advantageous for companies and employees alike, depending on the type of scheme used, particularly in comparison to cash-based bonus schemes.

For the company setting up the scheme, there may be:

  • corporation tax deduction available for the costs of establishing the scheme
  • corporation tax deduction on the exercise of options or acquisition of shares by employees
  • significant savings in respect of employers’ national insurance contributions (NICs).

For participating employees, share schemes can:

  • save – and in some cases, completely avoid – income tax and employee’s NICs
  • enable gains to fall into the beneficial capital gains tax regime
  • in certain cases, enable gains to be subject to entrepreneurs’ relief, which provides a 10% tax rate

If a government recognised tax-advantaged scheme is used, the key tax rules are as follows:

Enterprise Management Incentives

No income tax or NICs on grant of option

No income tax or NICs on exercise of option1

On sale of the shares, gains are subject to capital gains

Entrepreneurs’ relief will also usually apply

Company Share Option Plan

As for EMI but without application of entrepreneurs’ relief

Save As You Earn/SAYE/Sharesave

As for EMI but without application of entrepreneurs relief

 

Share Incentive Plan

Shares may be given free of charge to employees, and no income tax or NICs will arise2

Employees may also purchase shares out of pre-tax salary2

For as long as shares are held in trust, all gains remain free of capital gains tax

Employee Shareholder Status

No income tax on free shares with a value of at least £2,000 on date of award

No capital gains tax on sale of shares (with a value of up to £50,000 on date of award)

Employee Ownership Trust

Cash bonuses of up to £3,600 p.a. may be paid to each employee free of income tax (but not NICs)

Capital gains tax relief on the transfer of a controlling interest in the company into the trust

1 Provided option is granted with an exercise price at least equal to the actual market value of the shares.
2 A tax charge may apply if the employee ceases employment other than for specific reasons or if the shares are removed from trust, within 5 years of the award

Non tax advantaged plans

It is also possible to design tax efficient share plans without using the government recognised schemes above.  For more information, see JSOP, DSPP, Growth Share Plans.

 
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