Employee Share Scheme

Is your employer offering you company shares? If they are, you may potentially be entitled to tax advantages.  This article sheds light on how tax is treated on share-based payments in the UK.

What is a UK Employee Share Scheme?

An employee share scheme or UK stock option plan is a way for companies to share ownership with their employees. It’s a part of the employees’ remuneration package and may involve distributing free shares or granting certain options to buy shares at a fixed price in the future.

HMRC has approved four main tax-advantaged employee share schemes in the UK:

• EMI – Enterprise Management Incentive
• CSOP – Company Share Option Plan
• SAYE – Save as you Earn
• SIP – Share Incentive Plan

Tax relief is treated differently for each scheme, with some benefitting employees more, and others favouring employers more.

Are Employee Share Schemes Tax-Free in the UK?

We get this question a lot here at Adam Accountancy from both employees and employers. It’s only natural for company owners and directors to keep costs as low as possible, so let’s quickly answer this before discussing the different types of HMRC-approved schemes and how tax is treated.

For employees, the answer is almost always a ‘no’.

UK shareholders are subject to Capital Gains Tax (CGT) – so, one way or another, employees will be paying tax (on gains) on the share-based payments their employers grant them. However, what employees can do is avoid paying the top CGT rate.

EMI schemes, for example, are quite tax-friendly for employees, who are availing a lower rate of 10% on any gains over and above the HMRC-approved value, once the shares are sold. This is assuming the sale is at least 24 months following the grant of options.

This is one reason why share-based payment schemes make for excellent incentives – compare these to the standard amount of tax employees pay on their annual bonus – particularly the top earners who are in a higher tax rate bracket – and you’ll find that share-based payments have lower tax rates. EMI schemes, in fact, are quite cost-effective for companies as the scheme allows them to enjoy a number offsets against their own CT liability.

Other schemes don’t quite come close to the same position as EMI and have broad and varying implications. Still, they can be useful in a number of ways, depending on what employers want to achieve.

The key thing to remember when understanding how tax is treated on share-based payments in the UK are the three points at which tax is due on employees:

• On award or grant (affects ordinary shares only)
• On exercise (affects options only)
• On sale (affects all shares)

So, for example, if we take CSOP:

Grant – No tax

Exercise – No income tax if shares are held for 3 years from the grant date

Sale – CGT taxed on the difference between share value at sale and the cost involved in the exercise option.

To better understand how the three points come into play with regard to each scheme, contact our friendly solicitor now.

Further Reading from HMRC Link

Our friendly and approachable Accountants in Slough, Adam Accountancy can advise you personally on the ones that apply to you.