Employee Share Scheme UK Guide

The UK has long encouraged employee ownership through Employee Share Schemes (ESS).

These are an effective and flexible tool which allow employers to grant employees a share in the ownership of the company they work for. An added incentive is that both employer and employees can receive tax advantages through approved schemes like Share Incentive Plans (SIP) and Save As You Earn (SAYE).

What is an employee share scheme?

An employee share scheme is a way for employers to share company ownership with employees as part of their remuneration package. It can be a useful tool to help employers recruit, retain and incentivise employees. For employees it can be an additional way to help them achieve their financial goals.

While there are different forms of ESS, this article will focus on these commonly used HM Revenue and Customs (HMRC) approved tax-advantaged share schemes available in the UK:

• Enterprise Management Incentive (EMI): Employees are given an option to buy shares at an agreed purchase price after vesting.
• Company Share Option Plan (CSOP): Employees are given an option to buy shares at a non-discounted purchase price.
• Save as you Earn (SAYE): Employees are given an option to buy shares at a discounted price OR simply take back all contributions after 3 or 5 years.
• Share Incentive Plan (SIP): Employees are given shares for free AND/OR can choose to buy shares in the company.

How do HMRC-approved employee share schemes work?

1. Enterprise Management Incentive (EMI)

An EMI scheme allows companies to offer up to £250,000 worth of shares to each employee. Ideal for small companies having assets of £30 million or less.

• Participants: Can invite selected employees
• Discount for purchasing shares: Discount possible – depending on scheme design
• When to exercise: Depends on vesting
• Purchase limits: Employees can be offered up to £250,000 worth of shares
• Tax:
  – Grant: No tax
  – Exercise: No income tax and no National insurance contributions (NIC) (if conditions fulfilled)
  – Sale: Capital gains tax (CGT) at Business Asset Disposal Relief (BADR) rate – 10%* will be due if at least 24 months have passed from the date of grant.
  – Corporation tax relief: The option gain (the difference between the market value when the shares are acquired and the amount that the employee pays for them) and the scheme setup and administration costs

2. Company Share Option Plan (CSOP)

CSOPs allow companies to grant up to £30,000 worth of shares at a non-discounted purchase price to any employee or full-time director.

• Participants: Can invite selected employees
• Discount for purchasing shares: No discount under CSOPs
• When to exercise: Typically held over 3 years before sale to enjoy more tax benefits
• Purchase limits: Employees can be offered up to £30,000 worth of shares
• Tax:
  – Grant: No tax
  – Exercise: No income tax if shares held for 3 years from the grant date
  – Sale: CGT is taxed on the difference between the share value at sale and the cost used to exercise option
  – Corporation tax relief: The spread (the difference between the market value of the option shares on the date of exercise and the exercise price), and the scheme setup and administration costs

3. Save as you Earn (SAYE)

Under Save As You Earn, employees save a set amount from their salary each month for a specified period of time and are granted the option (i.e. the right) to buy shares in the company at an agreed future date at a discounted purchase price (i.e. exercise price), using these accumulated savings. When the plan ends, employees can either use their savings to buy shares OR choose to take back all contributions.

• Participants: Must invite all eligible employees
• Discount for purchasing shares: Up to 20%
• When to exercise: 3 or 5 years (depending on your savings contract)
• Purchase limits: Employees can contribute between £5 and £500 per month
• Tax:
  – Grant: No tax
  – Exercise: No income tax if shares held for 3 years from the grant date
  – Sale: CGT is taxed on any gain over the amount paid for the shares minus any sale expenses
  – Corporation tax relief: The cost of setting up and administering the scheme.

4. Share Incentive Plan (SIP)

A SIP works by keeping the shares awarded in a trust for employees until they either leave the job or decide to take the shares from the plan.

If you, as an employer, decide to set up a SIP, you can choose to offer your employees either one or else a combination of four ways to get the shares: Free Shares (free to employees), Partnership Shares (paid by employees), Matching Shares (free to employees) and Dividend Shares.

• Participants: Must invite all eligible employees
• Discount for purchasing partnership shares: Depends on scheme design
• When to exercise: Typically held over 5 years before withdrawal to enjoy more tax benefits
• Purchase limits:
  – Free share: employers can give each employee shares worth up to £3,600
  – Partnership share: employees can use up to £1,800 to buy shares
  – Matching share: employers can give employees further shares at a ratio of up to 2:1 for each partnership share acquired
• Tax:
  – Grant: No tax
  – Withdrawal: No income tax if shares held for 5 years. It’s possible to withdraw earlier and income tax will be chargeable.
  – Sale: CGT is taxed on the difference between the share value at sale and the value at the time of withdrawal
  – Corporation tax relief: The cost of setting up and administering the scheme.

Summary of the 4 HMRC-approved share schemes

	EMI	CSOP	SAYE	SIP
Participants	Can select certain employees	Can select certain employees	All-employee plan	All-employee plan
How it works	Employees are granted an option to buy shares at agreed purchase price after vesting	Employees are granted an option to buy shares at non-discounted purchase price	Employees are granted an option to buy shares at discounted price OR simply take back all contributions after 3 or 5 years, depending on term chosen	Employees are given shares for free AND/OR can buy shares in the company
When to exercise	Depends on vesting	3+ years to enjoy more tax benefits	3 or 5 years, depending on term chosen	5+ years to enjoy more tax benefits
Discount for purchasing shares	Discount possible – dependent on scheme design	No discount	Up to 20% off	Depends on scheme design
Tax at grant	No	No	No	No
Tax at exercise/withdrawl	No tax at exercise if purchase price >= AMV at grant	No tax at exercise (at least 3 years from grant date)	No tax at exercise (at least 3 years from grant date)	No tax at withdrawal if shares held for 5 years
Tax at sale	CGT at BADR rate – 10% will be due if at least 24 months have passed from the date of grant	CGT – Taxed on difference between the share value at sale and the cost used to exercise option	CGT^^ – Taxed on any gain over the amount paid for the shares minus any sale expenses	CGT^^ – Taxed on difference between the share value at sale and the value at the time of withdrawal

^^ Personal pensions are CGT-free, this means there may be no CGT when you transfer the shares into your pension scheme from a SIP or a SAYE scheme directly or eventually sell the shares. ISAs are also CGT-free but have limits on the transferring amount and period. Speak to a financial adviser for full details.

Benefits for employers

Enjoy tax benefits
The employer may be able to claim a corporation tax deduction when operating an employee share plan, which can help offset the set-up cost and smooth that initial leap.

Attract and retain top talent
These types of schemes can help a company recruit, retain and incentivise employees by providing them with financial incentives above and beyond base salary and with the potential for more benefits than a cash-only bonus.

According HMRC Research Report 700 published in 2023, 81% of surveyed companies indicated an improvement in employment and/or business outcomes, while 74% reported that offering a share scheme helped retain and/or recruit staff.

Create ownership among employees
Giving employees a real stake in the company can help make them think more like owners and therefore align their interests with overall company goals.

When they company succeeds they succeed. Some of the benefits of introducing an employee share scheme can include  reduced turnover and absenteeism, more company pride and loyalty and a greater willingness to work harder and make more suggestions to improve overall performance.

Benefits for employees

Provide an opportunity to build wealth
Such schemes can help improve your employees’ financial wellbeing by providing financial incentives which they can then potentially use for long-term goals like retirement, or shorter-term goals, such as buying a car/home or paying for college. Employees close to retirement and working at a company with an employer ownership plan had more than 10 times the median savings of employees nationally (Source)

Enjoy tax benefits
Tax reliefs can be generous to participating employees, including
– No tax at grant
– No income tax and no NICs at exercise if conditions are met

So, are employee share schemes worth it?

As discussed, employees can take advantage of the tax benefits and any gain in value to make their lives more financially healthy. For businesses, it’s a win-win to have happy employees who feel they’re rewarded for their work and also take advantage of the corporate tax relief.

Statistically, the total number of companies running ESS in the tax year ending 2023 was 19,990. This is an increase of 7% compared to 2022.

However, share schemes do carry risks. If your company fails and the share value decreases, employees may not be able to sell their shares for a profit. (Note: SAYE schemes allow you to take back all contributions while not all other schemes do.)

Employee share scheme administration

Share scheme administration is the process of granting and managing an equity plan. The process involves everything from tracking and reporting changes in ownership to updating documents/policies/procedures, communicating with HMRC and other stakeholders, consulting with your board of directors and staying compliant.

There are many administrative tasks and advanced knowledge involved. Companies usually choose to 1/operate the plan themselves, 2/hire professionals to run it for them or 3/use a software program to manage their schemes.

The first option is usually the most impractical one as companies often may not have all the required skillsets and rather spend the majority of their time focused on their core business. The second and third options as a result often make more sense to many companies, who then choose to outsource the management of their scheme.

How we can help

At J.P. Morgan Workplace Solutions, our equity management platform and dedicated team of equity professionals can cover everything from implementation to granting, tracking, trading, compliance, tax and all other stages in between.

So if you think that a UK employee share scheme might be right for your company or would like to learn more, speak to us today. One of our team members will walk you through how to simplify your employee share scheme implementation and administration.