Employee share schemes: what are they and how do they work?

An employee share scheme offers staff a stake in the business they work for and can be used as a way for a company to engage with their employees.

They also typically offer tax advantages for employees.

There are several employee share schemes, including Save As You Earn, Share Incentive Plans, Company Share Option Plans and Enterprise Management Incentives.

There have been many consultations recently around employee share schemes and it is hoped there are some updates later this year. 

Employee share schemes can help businesses by boosting productivity and morale as well as offering tax advantages to workers.

In 2023, HMRC revealed that 81% of companies say these schemes have helped boost their business, with nearly three-quarters believing it has helped them retain and recruit staff.

However, 31% of businesses said they were unaware of these schemes and believed they were too complicated to set up.

Now, we’ll reveal how these employee share schemes work and the pros and cons.

What is Save As You Earn (SAYE)?

Employees can buy discounted shares for a fixed price in their company via the SAYE scheme, if they save money every month for three or five years.

Under this scheme, you can save up to £500 a month and then at the end of the three or five-year term, you can use this money to buy shares in your company.

There are tax advantages with SAYE, as any interest and bonus at the end of the term are tax-free.

The bonus is calculated as a multiple of a single month's employee salary deduction, currently set at ×1.1 for three-year contracts and ×3.2 for five-year contracts. Plus, you don’t pay income tax or national insurance on the difference between what you pay for the shares and their value.

One potential downside is you may have to pay capital gains tax (CGT) if you sell your shares, but you can avoid this if you transfer the shares either:

• To an individual savings account (ISA) within 90 days of your scheme ending
• To a pension from the scheme when it ends (and up to 90 days later)

If your shares rise in value after you buy them but before you transfer them, you may have to pay CGT.

What is a Share Incentive Plan (SIP)?

Employees can purchase shares directly in their company via a SIP, or your employer can offer shares as a reward.

Your employer can give you up to £3,600 of free shares in a tax year, or they can give you up to two free matching shares for each partnership share you buy.

Alternatively, you can buy shares with your salary before you get taxed. You can only spend £1,800 or 10% of your income in any tax year (whichever is lower).

If your SIP allows it, you can buy more shares with dividends you get from existing company shares. You don’t pay any income tax on these if you keep the dividend shares for at least three years.

A big advantage of buying shares through a SIP is that you typically don’t pay income tax or national insurance. The one caveat here is you must keep them in the plan for five years.

You also don’t pay CGT on any shares you sell if you keep them in the plan until you sell them. If you take them out and sell them later, you might pay this tax if the value has risen.

What is a Company Share Option Plan (CSOP)?

With a CSOP, you can buy up to £60,000 worth of shares in the future at a fixed price. This was increased from £30,000 as of April 2023. 

Similar to other employee share schemes, you don’t pay income tax or national insurance on the difference between what you pay for the shares and their value if you buy shares between three and 10 years after being offered them.

However, you may be liable for CGT if you sell them.

What are Enterprise Management Incentives (EMIs)?

If you work for a small company with assets of £30 million or less, you may be able to get share options up to the value of £250,000 in a three-year period via an EMI.

If you buy the shares for at least the market value when given the option, you won’t pay any income tax or national insurance.

But if you were allowed to buy the shares at a discount, you’d have to pay income tax or national insurance on the difference between what you pay and the value of your shares.

You may be liable for CGT if you sell your shares. 

Unlike other employee share schemes, some companies are not allowed to offer EMIs. These companies include those working in banking, farming, property development, shipbuilding and legal services.

What are the disadvantages of employee share schemes?

Shares in an unlisted company can be much harder to value (and sell) compared to listed companies and there’s a chance the value of your shares could fall in value if the business struggles.

While these schemes encourage better staff retention, some workers may stay at a company they’re considering leaving to qualify for shares, potentially damaging productivity.

If you leave before any specified period in an employee share plan, you’ll likely have to repay any income tax relief and national insurance..

If you’re unsure whether to get involved in your company’s employee share scheme, it’s worth doing some research.

Get expert financial advice

Employee share schemes offer a unique opportunity for employees to benefit from the success of their companies while enjoying potential tax advantages.

However, they also come with certain risks that require careful consideration.

Whether you choose SAYE, SIP, CSOP, or an EMI, understanding the specific benefits and drawbacks can help you make an informed decision about participating in these schemes.

Unbiased will match you with a financial adviser for expert financial advice on navigating employee share schemes, including understanding the tax implications and how to optimise your benefits.