Set up employee share schemes

Setting up employee share schemes - considerations 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.

However, there are some disadvantages for employees, such as:

• Risking losing the value of their shares as well as their jobs if the business runs into difficulty, which increases employees' financial dependence on the business.
• Sometimes being expected to take a lower salary in return for getting shares.
• Having to stay with the company for a certain period to qualify. This may tie employees to a job they would otherwise leave and may affect both their own morale and productivity and those of other workers.
• Leaving before the period specified in the plan means employees lose any options/shares and may have to repay National Insurance contributions (NICs) and income tax relief.
• Having 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 employees of private companies may not be able to sell the shares easily to raise the money.
• Having to pay income tax and NICs each time a restriction is changed or removed, if their shares in an unapproved scheme carry restrictions.

Tax advantages for HM Revenue & Customs (HMRC)-approved schemes

Employees participating in tax-advantaged schemes - ie those approved by HMRC - don't pay income tax or NICs when they acquire the shares.

Under a 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: share incentive plans 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
• Setting up employee share schemes - considerations for employers
• Setting up employee share schemes - considerations for employees
• An overview of the various employee share schemes
• HM Revenue & Customs-approved schemes: company share option plans and enterprise management incentives
• HM Revenue & Customs-approved schemes: share incentive plans and Save As You Earn
• Taxed employee share schemes - taxed share options, long-term incentive plans and phantom share schemes
• Taxed employee share schemes - restricted, convertible and benefit trusts
• Choosing the best share scheme for your business
• Considerations when setting up a share scheme
• Here's how I set up a successful employee share scheme

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