Set up employee share schemes

Taxed employee share schemes - restricted, convertible and benefit trusts

Taxed employee share schemes allow you greater flexibility than HM Revenue & Customs tax-advantaged (approved) schemes. However, gains may be subject to income tax under PAYE, and National Insurance contributions (NICs). A company generally gets corporation tax relief for the cost of providing shares - but not other securities such as bonds, stocks, contracts and futures - to employees under a taxed scheme, but there are some restrictions.

Restricted shares

Employees acquire shares that are subject to restrictions on what they can do with them for a certain time or that relate to certain performance targets. Income tax and NICs can be deferred on the part of the shares' value that is subject to the restrictions, but only until they are changed or removed.

However, employees and employers can choose not to defer income tax and NICs and instead to calculate them when the shares are acquired as if the restrictions didn't affect the value. Any corporation tax relief due in respect of restricted shares is also deferred.

Convertible shares and securities

You may decide to reward employees with shares or other securities such as bonds, stocks, contracts and futures that will convert into different shares or securities at a later date. If an employee makes any gain when the convertible share or security is first acquired, they will be charged on that gain via income tax and NICs, and they will also be charged on any gain when it converts into a more valuable share or security.

In certain circumstances, employers may ask employees receiving earnings in this form to bear the cost of some or all of the employer's NICs on those earnings. Employees benefit from a reduction in their taxable income equal to the amount of any employer's NICs they pay.

Employee Benefit Trusts

These can be used for many purposes, eg holding shares for employee share incentive plans, or to create an internal market for shares in an unlisted company. Tax relief may be available for the cost of administering the plan and for any contributions to the trust.

Subjects covered in this guide

• Introduction
• Defining share option and share award schemes
• Employee share ownership - for employers
• Employee share ownership - for employees
• Different schemes - an overview
• HM Revenue & Customs-approved schemes: CSOP and EMI
• HM Revenue & Customs-approved schemes: SIP and Save As You Earn
• Taxed employee share schemes - taxed, phantom and long-term incentive share plans
• Taxed employee share schemes - restricted, convertible and benefit trusts
• Choosing the best share scheme for your business
• Set up a share scheme
• Here's how I set up a successful employee share scheme

 

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