Set up employee share schemes

Employee share ownership - for employees

Employee share schemes let employees benefit from the business success they're helping to create. Share options pose no financial risk - if the market value is less than the exercise price, employees don't have to exercise the option.

There are some disadvantages for employees:

• Increased financial dependence on the business - employees risk losing the value of their shares as well as their jobs if the business runs into difficulty.
• Some employees on low salaries may prefer to receive cash not shares.
• Employees may have to stay with the company for a certain period to qualify. This may tie them to a job they would otherwise leave and may affect both their own morale and productivity and those of other workers.
• Employees who leave before the period specified in the plan lose any options/shares and may have to repay National Insurance contributions (NICs) and income tax relief.
• Employees may have to pay income tax and NICs when they acquire shares in a taxed (unapproved) scheme even if they haven't got enough money to do so without selling some or all of the shares - and in private companies employees may not be able to sell the shares easily to raise the money.
• If their shares in an unapproved scheme carry restrictions, employees will have to pay income tax and NICs each time a restriction is changed or removed.
• Administration costs could increase.

Tax advantages for HM Revenue & Customs-approved schemes

Employees participating in tax-advantaged (approved) schemes don't pay income tax or NICs when they acquire the shares.

Under the Share Incentive Plan (SIP) there is no Capital Gains Tax as long as the employee sells their shares as soon as they are removed from the plan - see the page in this guide on the HM Revenue & Customs-approved schemes: SIP and Save As You Earn . Dividends on plan shares may be reinvested tax-free in further plan shares.

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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