Thinking about joining a company share scheme or offering one to your employees? Share schemes can be a great way to reward staff and build loyalty, but they also come with important tax and legal considerations.
What is a share scheme?
A share scheme is a way for employees to own a stake in the company they work for. It usually involves giving or offering shares at a discount, or under special terms. These schemes are often used to reward performance and encourage long-term commitment.
Are there different types of share schemes?
Yes. In the UK, there are several government-approved schemes that offer tax benefits, including:
- Share Incentive Plans (SIPs) – allow employees to buy shares directly or receive them for free.
- Save As You Earn (SAYE) – lets employees save monthly and buy shares at a discount after a set period.
- Company Share Option Plans (CSOPs) – give employees the right to buy shares in the future at a fixed price.
- Enterprise Management Incentives (EMIs) – aimed at smaller companies, offering generous tax breaks.
Each scheme has its own rules and benefits.
There are also several other schemes available in the UK which aren’t specifically approved in tax legislation, but which can still provide tax or commercial benefits to the participant and the incentivising company. These include; growth shares, phantom share schemes, long term incentive plans and unapproved options.
How do share schemes affect the company’s tax?
Companies can usually claim a corporation tax deduction when employees receive shares. This deduction is based on the value of the shares when employees get them, minus anything the employee paid.
There may be other implications for the company depending on the type of scheme and how it is implemented – for example, there could be Pay As You Earn obligations and Employer’s National Insurance Contributions payable.
What do companies need to do?
To comply with their requirements, companies must:
- Register the scheme with HMRC (if it’s an approved scheme);
- File annual reports about the scheme;
- Keep clear records of who gets what and when; and
- Follow company law when issuing new shares.
Missing these steps can lead to penalties or loss of tax benefits.
As well as the legal requirements, the company may also want to implement its own “best practice” – for example, providing a guide to participants explaining how the scheme works.
Will employees pay tax on their shares?
It depends on the scheme. Some approved schemes either reduce or completely eliminate any income tax and National Insurance cost when they get the shares. But if they sell the shares later for a profit, they may have to pay Capital Gains Tax (CGT).
What happens if the company is sold or goes public?
Most share schemes include rules setting out what happens during a sale or IPO. Employees might be able to sell their shares early or receive a cash payment. It’s important to check the scheme’s terms and get legal advice if needed.
What are the risks of getting it wrong?
If a scheme isn’t set up or managed properly, the company and employees could lose tax benefits. There could also be legal issues or disputes if the rules aren’t clear.
When should you get legal advice?
It’s a good idea to speak to a solicitor or tax adviser when:
- Setting up a new scheme
- Making changes to an existing one
- Preparing for a company sale or merger
- Dealing with international employees
Share schemes can be a win-win for companies and employees – but only if they’re done right.
Get in touch with us today to find out how our corporate tax team can support you.
