UK: Employee Share Schemes

Last Updated: 12 February 2018
Article by Clyde & Co LLP

1. Introduction

Employee share schemes are designed to encourage employees to become shareholders in their employer company. These schemes can take a variety of forms. Most involve share options but with some schemes employees are awarded actual shares. A basic distinction is between schemes with special tax advantages and those without. 'Phantom' schemes only involve cash payments but aim to replicate the effect of a share scheme.

2. Tax Advantaged Schemes

2.1 Enterprise management Incentives ('EMI')

This is a highly flexible arrangement with substantial tax advantages, under which employees are granted options in the employing company:

  • Participants do not suffer a charge to UK income tax or NIC on grant of an EMI option
  • Participants do not suffer a charge to UK income tax or NIC on exercise of an EMI option within ten years of grant (so long as the exercise price is at least equal to the market value of the underlying shares at the date of grant)
  • Participants may suffer a charge to UK capital gains tax on a subsequent disposal of shares acquired on exercise of an EMI option
  • The employer company can decide which directors and/or employees receive EMI options (so long as they satisfy certain minimum working time requirements) and many of the terms (e.g. performance conditions) of those options
  • Maximum value of £250,000 of shares over which options can be granted to any single participant
  • Maximum value of £3 million of shares over which options can be granted in total by the employer
  • Only small and medium sized companies (i.e. those with less than £30 million gross assets and fewer than 250 full-time employees) can offer EMI options
  • The company must not be controlled by another company
  • Non-trading companies and companies carrying out certain 'lower risk' trades (e.g. dealing in land and certain financial activities) cannot offer EMI options
  • An employer company cannot offer both £30,000 of CSOP options (discussed below) and £250,000 worth of EMI options to a single participant. The maximum value of EMI options that can be granted is reduced by the value of CSOP options in issue (and vice versa)

2.2 Employee Shareholder Status ('ESS')

This was another flexible scheme with substantial tax advantages. However, the government was concerned that the scheme was being abused by highly paid directors, who were not the people the scheme was intended for. Consequently, the government announced in the November 2016 Autumn Statement that the ESS tax advantages will no longer apply for arrangements entered into on or after 1 December 2016.

2.3 Share Incentive Plans ('SIPs')

An arrangement under which an UK resident trust acquires shares in the employer company for the benefit of employees. Participants acquire shares by gift, purchase or 'matching'.

  • Participants obtain full exemption from UK income tax and NIC if shares are held by the UK trust for five years
  • Limited flexibility in the terms of the SIP
  • All employees must be invited to participate (subject to a minimum service requirement of up to 12 months)
  • The UK trust must hold all shares for at least three years
  • Participants may obtain shares by: Gift of up to £3,600 worth of shares per year
  • Partnership shares can be bought up to a maximum of the lesser of £1,800 per year and 10% of pay for each year from pre-tax income.
  • Matching (i.e. an employer may 'match' partnership shares at a ratio of up to 2:1)

2.4 Company Share Option Plans ('CSOPs')

An arrangement under which an employer company grants options to specific directors and/or employees to acquire shares in the employer for a price not manifestly less than the market value of the company's shares (as at the date of grant).

  • Participants must retain CSOP options for a minimum period of three years to qualify for full exemption from UK income tax and NIC
  • Reasonable flexibility (e.g. performance conditions can be incorporated in a CSOP)
  • The employer company can decide which directors and/or employees participate in the CSOP (so long as they satisfy certain minimum working time requirements)
  • No restrictions on participants retaining CSOP options on termination
  • Maximum value of £30,000 of shares over which options can be granted to any single participant

2.5 Save As You Earn ('SAYE') Plans

A Savings Related Share Option Scheme is simply an arrangement whereby employees save a fixed amount each month into a designated building society account (an SAYE account). This is topped up by a tax-free bonus from the building society and the funds can then be used to exercise options over employer company shares.

  • There are no income tax or NIC implications an grant or exercise of the share options
  • Participants may suffer a charge to UK capital gains tax on a subsequent disposal of shares acquired on exercise of an SAYE option
  • All employees must be eligible to participate although those with less than 5 years service can be excluded
  • Employees with more than 25% of the shares cannot participate
  • The options granted can be at a discount of up to 20% of the value of the shares at the date of the grant
  • The SAYE account must be for 3,5 or 7 years and the length of the contract and monthly savings are fixed at the start
  • The maximum contribution is £500 per month
  • The bonuses awarded are a multiple of monthly contributions
  • If an employee leaves voluntarily the options lapse, but the employee can either continue saving and earn the tax-free bonus or withdraw the savings with tax-free interest to that point

3. Other schemes

There is immense flexibility in the other types of arrangements that can be adopted; however, UK tax legislation generally charges participants to UK income tax (and NIC where appropriate) in respect of most employment-related gains arising under these arrangements. Two of the more common types are described below.

3.1 Option Plans

An arrangement under which an employer company grants options to specific directors and/or employees to acquire shares in the employer.

  • Participants suffer no charge to UK income tax on grant of an unapproved option
  • Participants suffer a charge to UK income tax (and NIC, where appropriate) on a 'chargeable event' (e.g. exercise, assignment or release of an unapproved option) – the amount of the charge is generally calculated by reference to the difference between the value received on exercise, assignment or release and the price paid by the employee
  • Participants may suffer a charge to UK capital gains tax on a subsequent disposal of shares acquired on exercise of an unapproved option.

3.2 Restricted Share Schemes

An arrangement under which an employer company grants shares or other securities in the employer (or another entity) to specific directors and/or employees

  • Participants may, in certain circumstances, suffer a charge to UK income tax (and NIC, where appropriate) on acquisition of restricted shares
  • Participants may also suffer a charge to UK income tax (and NIC, where appropriate) on a subsequent 'chargeable event' (e.g. the cessation or variation of restrictions affecting the shares, or a disposal of the shares while they are restricted) – the amount of the charge is calculated as a proportion of the restricted share's value on a chargeable event
  • To the extent that an income tax charge has arisen, future growth in the value of the shares will generally be subject to capital gains tax
  • Elections can be made on acquisition of restricted shares that may affect an income tax charge. However, as future growth in the value of the shares will be subject to capital gains tax, this may result in a lower overall charge

4. 'Phantom' schemes

Directors and/or employees who participate in 'phantom' or 'shadow equity' schemes receive a cash payment (i.e. a bonus) calculated by reference to the appreciation in value in shares or options in the employer company. The cash payment is subject to UK income tax and NIC in the hands of participants in the same way as salary or wages.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Smith & Williamson
Smith & Williamson
Smith & Williamson
Charles Russell Speechlys LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Smith & Williamson
Smith & Williamson
Smith & Williamson
Charles Russell Speechlys LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions