Exploring Employee Share Schemes
Here, we look at the main tax-advantaged employee share schemes, focusing on limits and tax implications. This is particularly relevant to the CII R03, R06, AF1, AF4, and AF5 exams.
This article is correct as at 18 June 2024.
Employee Share Schemes
If an employer offers company shares to employees, there could be tax advantages where the shares are offered via
- Share Incentive Plans;
- Save As You Earn;
- Company Share Option Plans; or
- Enterprise Management Incentives (EMIs).
Share Incentive Plans (SIPs)
There are four ways an employee can obtain shares under a SIP:
| Free shares | An employer can give an employee up to £3,600 of free shares each tax year. |
| Partnership shares | An employee can buy shares out of their salary before tax deductions, although these are limited to £1,800 or 10% of their income each tax year, whichever is lower. |
| Matching shares | An employer can give up to 2 free matching shares for each partnership share bought. |
| Dividend shares | An employee can buy more shares with the dividends received from free, partnership or matching shares, if their employer’s scheme allows this. They will not have to pay Income Tax if they then keep the dividend shares for at least 3 years. |
Tax treatment of SIP shares:
| Income Tax/National Insurance contributions | Hold shares in SIP for 5 years to be free from Income Tax and NICs. |
| Capital Gains Tax | No CGT on shares if kept in SIP until sold. Once taken out of plan, CGT may be payable if their value has increased. |
Save as You Earn (SAYE)
With SAYE, an employee can buy company shares with the savings they have built up in the scheme for a fixed price:
- Employees can save up to £500 a month;
- After 3 or 5 years, the savings can be withdrawn and spent as the employee wishes, or they can be used to buy shares.
Tax treatment of SAYE shares:
| Income Tax/NICs | No tax on savings interest or on any bonus received at the end of the scheme. No Income Tax or NICs on the difference between the fixed price (the pre-agreed share price) and the market value of the shares when purchased. |
| Capital Gains Tax | No CGT if shares are transferred to an ISA within 90 days of the scheme ending or if shares are transferred to a pension directly from the scheme when it ends. A transfer to a pension can still be made within 90 days of the scheme ending, however CGT may be payable on any interim gain (i.e. from the scheme ending to the transfer). In all other cases, CGT may be payable on any gains. |
Company Share Option Plan (CSOP)
Under a CSOP, the employee is granted the option to buy up to £60,000 worth of shares in the future at a fixed price.
Tax treatment of CSOP shares:
| Income Tax/NICs | No Income Tax or NICs on the difference between the fixed price (the pre-agreed share price) and the market value of the shares when purchased. |
| Capital Gains Tax | CGT may be payable on any gains. |
Enterprise Management Incentives (EMIs)
Companies with assets of £30 million or less, may be able to offer EMIs. Share options up to the value of £250,000 can be granted to an employee in a 3-year period.
Note that companies that work in excluded activities, such as banking, farming and property development, are not allowed to offer EMIs.
Tax treatment of EMIs:
| Income Tax/NICs | No Income Tax or NICs if the employee buys shares for at least the market value they had when they were granted the option. If a discount on the market value is given, the employee has to pay Income Tax or NICs on the difference between what they pay and what the shares were worth. |
| Capital Gains Tax | CGT may be payable on any gains when the shares are sold. |
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