Share incentive plans give employees a chance to acquire shares in the company they work for, thereby giving them a financial stake in the company’s success and an incentive to work harder. Companies may offer their staff “free shares” in the company, up to £3,000 per year per employee, free of tax for the employee. They may also choose to give their staff the chance to buy up to £1,500 “partnership shares” in the company per annum. The employees do not have to pay income tax or national insurance contributions on the salary used to buy the partnership shares. In addition to this, the company may also choose to give up to two “matching shares” to an employee for each partnership share the employee buys.
All employees must be included in the scheme, but the company can stipulate a minimum period of employment (up to eighteen months) before staff become eligible for the share incentive plan. The provision of free shares by the company may be linked to performance targets for the staff. The company’s share incentive plan may allow dividends arising on the employees’ share to be reinvested tax-free in further shares, known as “dividend shares”, up to a maximum of £1,500.
The company’s tax incentive scheme may stipulate that where the employee leaves within three years the free and matching shares are forfeited. The tax rules require that where the free, partnership or matching shares leave the tax incentive plan within three years the employee must pay income tax and national insurance contributions on the market value of the shares at the date they are taken out of the plan.
No capital gains tax is due on the sale of the shares if they are left in the tax incentive scheme until they are sold. If they are taken out of the plan, capital gains tax arises on the increase in value of the shares between the date they are taken out of the plan and the date they are sold.
Approved share option schemes
A company can offer employees options to buy its shares under an approved share option scheme. Normally, an income tax charge would be made where an option to buy shares is exercised. Under an approved share option scheme, this charge to income tax does not arise, so companies can offer tax efficient incentives for their employees.
Where a company introduces a savings related share option scheme, the company grants the employee an option to buy shares, and the chance to save via a tax-free savings scheme so that the employee can accumulate savings and pay for shares in the company when they decide to exercise the option. The savings contract can last between three and five years and the amount saved tax-free by the employee is limited to £250 per month. The price at which the employees will have the option to buy the shares must be at least 80% of the value of the shares at the date when the option is granted. The company’s savings related option scheme must be open to all employees, subject to a minimum period of employment which cannot be more than five years.
Another type of approved scheme is the company share option plan, which gives more flexibility to the company. A company can choose which employees can be eligible for the plan and can make access to the benefits of the share option plan dependent on the achievement of performance targets. The price at which employees can exercise the option must not be significantly more than the value of the shares at the date the option is granted by the company. The plan should provide that the options should be exercised between three and ten years after the date they are granted, or less in the case of injury, disability, redundancy or retirement. An employee cannot hold options in respect of shares valued at more than £30,000 at the date the options are granted.
Enterprise management incentives
UK trading companies whose gross assets do not exceed £30 million and who have fewer than 250 employees may select employees to whom they give tax-free share options. The company can grant the options to any employee who works for the company for at least 25 hours a week and at least 75% of their total working time. Anyone who owns more than 30% of the shares in the company is not eligible for this scheme.
The company can choose to grant options to buy the shares at less than their market value; however an employee cannot hold unexercised options relating to shares valued at more than £120,000 at the time the options were granted. There is a maximum limit of £3 million on the total value of shares (at the time of the grant of the options) in respect of which employees can hold unexercised options granted under the scheme at any time. The company can choose which employees are offered options and there is no need to offer the same option package to each employee.
There is no charge to income tax or national insurance contributions when an option is granted under the scheme, and there is also no tax charge when the options are exercised if the shares are purchased by the employee at less than their market value at the time of the grant of the option. In other cases, tax is charged on the amount by which the value of the shares when the option was granted exceeds the amount paid for them, or if lower on the excess of the value of the shares when the option was exercised over the amount paid for them. When the shares are sold, capital gains tax is chargeable in the normal way.
HM Revenue and Customs www.hmrc.gov.uk
“Taxation” by Alan Melville, fifteenth edition, FT Prentice Hall 2010