At a glance
- Many high-earning professionals receive shares as part of a remuneration package from an employer. This can have implications for your tax liability, so it’s a good idea to know what share-option arrangements are available.
- There are different share schemes, which are typically subject to different tax rules. For instance, under the Enterprise Management Incentives scheme, which is often used by start-ups, employees selling shares would be entitled to Business Asset Disposal Relief on their Capital Gains Tax liability.
- If you receive shares as a benefit, it’s important to take expert advice to ensure you’re making the most of any available tax reliefs and advantages, and making your wealth work as hard for you as possible.
Companies are always thinking carefully about how they remunerate their key staff, and in the current business climate, share schemes continue to be popular. This is because they encourage loyalty and act as an incentive by ensuring employees – particularly those who are working at a high level, such as executives and directors – have a personal stake in the firm’s success.
“We come across many high-net-worth clients where part of their package is made up of either direct shareholdings or some kind of share-option arrangement, whether they’re at a private or public company,” says Simon Martin, Chartered Financial Planner at Technical Connection, which is owned by St. James’s Place.
There are several types of share schemes that come with different tax advantages, and what is offered to you will usually depend on the nature of your company. Here are some of the most popular schemes and how they are taxed:
Enterprise Management Incentives
The Enterprise Management Incentives (EMI) scheme is common among start-ups or newer companies.
Employees are given the option to own shares in the company if they meet certain performance or tenure criteria. It means companies can attract talent by offering the potential of investment rewards further down the line if they can’t currently compete with larger firms on salary.
A lot of technology companies use the EMI scheme. It’s an efficient way of getting shares into the hands of your key staff and giving them the opportunity to benefit from future growth value in a tax-efficient way.
A company can grant share options of up to £250,000 in a three-year period.
A typical scenario might be having the option to buy shares in the future for an agreed price, which will hopefully be worth more when the purchase takes place. For example, if the agreed price is £1 and the shares are worth £10 when they’re purchased, you would immediately make £9 profit per share.
No Income Tax or National Insurance will be due if the shares are bought for at least the market value they had when the option was granted. If you were given a discount on the market value, Income Tax and National Insurance would be payable on the difference.
Capital Gains Tax (CGT) will apply if you sell the shares. The tax rate would be 10%, however, rather than the usual 20%, as the sale would qualify for Business Asset Disposal Relief, providing the option has been held for at least two years.
Company Share Option Plan
A Company Share Option Plan (CSOP) gives you the option to buy up to £60,000 of shares in the future at a non-discounted fixed price.
No Income Tax or National Insurance is paid on the difference between what is paid for the shares and what they’re worth, as long as you’ve held them for three years. CGT may apply on the sale of the shares.
Save As You Earn
Save As You Earn (SAYE) is the most popular UK share scheme because businesses can offer it to all employees, unlike other schemes aimed at higher-level staff.
You can save between £5 and £500 a month for three to five years, which is deducted from your gross salary. At the end of the period, you have the option to buy shares in the company at the price set when you started saving – which is typically up to a 20% discount of the market price at the time.
If the share price has dropped in the meantime, you can simply decide not to buy the shares and withdraw the money as cash. The scheme is therefore relatively risk-free, although you’ll lose out on the interest or other growth you’d have earned if you’d saved or invested the money instead.
If you buy the shares, you can hold them or immediately sell them on for a profit. There is no Income Tax or National Insurance to pay. CGT will apply unless you transfer the shares to a pension or ISA within 90 days of the scheme ending.
Share Incentive Plans
With a Share Incentive Plan (SIP), employers may give away shares to employees or allow you to buy shares in the company through deduction from gross pay. The shares are held in a trust until you leave the company or take the shares.
An employer can give free shares up to the value of £3,600 to each employee per tax year, or employees can buy up to £1,800 worth.
There are four ways you can get shares through a SIP: free shares, partnership shares, matching shares or dividend shares.
There will be no Income Tax or National Insurance to pay if you keep the shares for five years.
If you release the shares from the trust and sell them on the same day, at the end of the five-year period, there will be no CGT to pay. If you release them and sell at a later date, there may be CGT to pay.
Other share plans
Employers may offer other share plans beyond HMRC’s tax-advantaged schemes. For example, it’s common for companies to offer bonuses paid or part-paid in shares, which won’t be paid until after a certain period.
So, you may be paid £20,000 worth of shares as a bonus, withheld for three years. At the end of the three years, the bonus will be subject to Income Tax and National Insurance, like a salary. If you leave before the three years, you’ll lose the bonus, so it encourages staff loyalty.
Whatever type of share scheme you may be offered as an employment benefit, it’s always a good idea to speak to us to ensure your money is working as hard for you as it can be.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
SJP Approved 14/10/2024