Employers may want to offer their employees and directors a stake in the company, and there are various schemes available, all with different tax treatments.
Save as you earn
Under a save-as-you-earn scheme, an employer can grant eligible employees and directors the option of purchasing company shares in the future for a price fixed at the start of the scheme. SAYE schemes may run for three or five years.
The employer may specify a minimum employment period of up to five years for employees and directors to qualify for the scheme. All individuals meeting that employment condition must then be offered the chance to participate in the scheme, on similar terms.
The options are granted at a discount of up to 20 per cent of the market value on the date the options are granted. This is the ‘exercise price’. Participants can save up to £500 a month into SAYE schemes.
There is no income tax or national insurance relief on the monthly savings, which is usually taken out of the participant’s net salary through pay as you earn.
At the end of the contracted savings period (the maturity date), the participant may either exercise their options or take the cash. If cash is taken, any interest that has accrued would be tax-free. The interest rate on SAYE schemes is set by HM Revenue & Customs and has been at zero per cent for a number of years.
If the participant chooses to exercise the options the shares will be purchased in their name. The base cost for capital gains tax purposes will be the price paid for the shares, not the market price at date of exercise.
If the participant leaves the company before three years their option will lapse, unless the reason for leaving falls within the ‘good leaver’ provisions (see Box 1).
If the participant is in a five-year scheme but leaves the company after three years, they may be able to exercise the options within the following six months.
The option to take cash means there is no market risk during the SAYE period, although the lack of interest means there is inflationary erosion of value and missed investment opportunity. The options must be exercised within six months of the maturity date otherwise they lapse and the cash savings are returned to the participant.
Share incentive plan
With a SIP, the employer awards shares to participants that are held in trust. Unlike SAYE, the shares are granted at the outset and there is no cash alternative available.
There are four different types of shares awarded under SIPs. The company can choose to offer qualifying employees and directors any combination of:
1) Partnership shares – the participant can opt to buy partnership shares out of their gross salary. The maximum allowed per tax year is the lower of £1,800 a year, or 10 per cent of the salary in the tax year.