Law & Tax

Tax advantaged all-employee share plans

Statutory all-employee share plans carry significant tax advantages. Broadly speaking, participation must be offered to all employees although there are minimum service requirements which can be imposed. There are two types, the SIP and the SAYE plan. As a result of recent legislative changes, it is no longer necessary to obtain the prior approval of HM Revenue & Customs before they can be operated.

Share Incentive Plan or "SIP"

A SIP offers tax and National Insurance breaks for both participants and corporate employers.  Apart from the tax benefits, for private companies its related employee benefit trust structure can be used to facilitate an internal market in shares.  US companies may use a SIP to replicate the features of a section 423 Plan (employee stock purchase plan).

Types of award

There are four types of share award: free shares, partnership (or purchased shares), matching shares and dividend shares.

Free shares

Companies may make awards of up to £3,600 worth of shares per employee in any tax year (which can be linked to performance).  These can be offered alone or in conjunction with Partnership Shares.

Partnership shares

Employees may buy up to £1,800 worth of shares in any tax year from pre-tax earnings paid either in lump sums or through monthly savings of up to £150 per month on average.

Matching shares

To encourage employees to buy partnership shares, companies may award up to 2 matching shares for each partnership share purchased.

Dividend shares

Companies may also allow participants to reinvest any dividends from plan shares to buy further shares which can also be held in the plan.

Holding periods and forfeiture

All shares have to be held in a special purpose trust.  Partnership shares can be withdrawn from the SIP at any time.  Free and matching shares must be held in the plan for at least 3 years but can be subject to a holding period of up to 5 years.  Free and matching shares can also be made subject to forfeiture if the company so decides.

Tax advantages for employees

The tax breaks for SIP awards are generous:  if the shares are held in the SIP for 5 years they may be withdrawn free of income tax, NIC and CGT (and the "base cost" of the shares for CGT purposes is uplifted to market value at the time of withdrawal).

If shares are held in the SIP for 3 years but before the fifth anniversary, income tax and NIC arise on the lower of their market valuation on acquisition and the market value of the shares when they leave the SIP - thereby making any accrual in value tax free.

The shares of "good leavers" whose employment terminates early can be withdrawn free of income tax and NIC at any time.

Otherwise, if shares are withdrawn within 3 years, income tax and NIC arise on the higher of the market value of the shares on the acquisition date and the date they are withdrawn.

Dividend shares may be withdrawn tax-free after just 3 years.

Tax advantages for employers

The main tax break is the employer's NIC savings in comparison to the cost of delivering the same benefit in cash.

A corporation tax deduction is available in the accounting period in which free and matching shares are awarded based on the cost of the shares to the SIP trustee.  If the partnership shares cost the trustee more to buy than the savings it receives from participants, a deduction is available for the additional cost.

Subject to certain conditions, if the SIP trustees buy shares from non-corporate shareholders that amount to more than 10% of the ordinary share capital, a corporation tax deduction is accelerated and available in respect of the contributions into the SIP used for such purposes is available.  This can assist with shareholder succession planning.

There are also corporation tax deductions available for set up and running costs.

Summary

The flexibility for companies to make different types of awards makes the SIP an ideal vehicle for companies looking to increase their employees equity participation.

For our full written guide to SIPs, qualification criteria and the associated tax advantages they offer please contact us.

Savings Related Share Option Plan or "SAYE"

Employees are granted options to acquire shares in the company which become exercisable in 3 or 5 years time, mirroring the length of a linked savings contract entered into at the same time.  The savings contract provides for monthly savings of between £5 and £500 over the same period.

The exercise price of a SAYE option can be discounted by up to 20% of the market value of shares in the company on the date of grant.  The maximum number of shares exercisable is determined by the proceeds of the saving contract.

Participants can choose either to exercise the option using the proceeds of the savings contract, or take the proceeds on maturity of the savings contract in cash.

Participants can also cash in his or her savings contract at any time prior to maturity, though the option will then be forfeited and any interest payable is adjusted downwards, potentially to zero for those doing so within the first 12 months.

"Good leavers" whose employment terminates before maturity may exercise their options with the accrued savings.

Tax advantages for employees

  • No income tax on grant of the option
  • No income tax on the proceeds of the savings contract or on exercise of the option if exercise is 3 years or more after grant or on termination of employment in certain good leaver scenarios (even if it was granted at a discount of up to 20% of the share price on the date of grant)
  • Capital gains tax (currently either 18% or 28%) arises on the sale of the shares acquired normally on the increase in value over the exercise price (if income tax was chargeable on exercise then, broadly, the capital gains tax will be chargeable on the gain over and above the market value of the shares on exercise)

Tax advantages for employers

  • A corporation tax deduction available for the employing company equal to the gain on exercise of the options (that is, the difference between the exercise price and the value of the shares when the options are exercised) 
  • A corporation tax deduction for set up and running costs

Summary

The combination of the risk free nature of the plan, the discounted exercise price and the tax benefits make the SAYE plan a popular choice for many listed companies.

For our full written guide to SAYE options, qualification criteria and the associated tax advantages they offer please contact us.

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