Employee Share Ownership
As well as the gift of existing shares to employees or directors, are taxable events which can lead to an employer/employee facing tax bills of up to 65% of any share value.
Unapproved share options
Where a company grants share options to its employees without using one of the share option schemes approved by HMRC, the employee will be subject to Income Tax via Pay-As-You-Earn tax (“PAYE”) and potentially National Insurance contributions (“NI”) (i.e. social security payments) when they exercise the option, meaning that they convert the option into shares. At this time, the employer may also need to make an NI contribution.
It is possible to elect to transfer the employer’s liability for the payment of NI contributions to the employee, but the election has to be approved by HMRC (please see ‘Joint Elections’ below).
In order to mitigate such charges, HMRC has approved a number of schemes to reduce the tax liability attributable to awarding share options.
Approved share option schemes
There are currently four HMRC approved share option schemes available. These are:
- Share Incentive Plan (SIP)
- Save as you Earn (SAYE)
- Company Share Option Plan (CSOP)
- Enterprise Management Incentive (EMI)
The first two of these, SIP and SAYE, are relatively low value schemes which are usually only used by very large organisations to incentivize a sizeable workforce. Where adopted, these schemes must be made available to all employees, including part-time employees who should be treated in the same way as full-time employees on a pro-rata basis.
The CSOP and EMI schemes are discretionary schemes
allowing a significant award of share options with more favourable tax
treatment than unapproved schemes.
Company Share Option Plan (CSOP)
CSOP’s are discretionary insomuch as the employer company can choose which employees and directors it wishes to reward.
The maximum option-value is £30,000 per employee based on the market value at the date of the grant. The option period must be between 3 and 10 years.
Enterprise Management Incentive (EMI)
The EMI scheme is perhaps the most attractive approved scheme because it allows for up to £3 million of company share options to be granted to employees. Individual employees may each be granted options up to a market value of £250,000, (calculated to take into account the value of any CSOP shares that may have already been issued to that employee). The main benefit of using an EMI Scheme is that no Income Tax or NI contributions are charged on the grant of EMI options, and, provided that (i) the exercise price is at least equal to the market value at the date of grant, and (ii) the options continue to qualify until the date of exercise (which must be within ten years from the date of grant), then there will also be no Income Tax or NI charge at the point of exercise.