Are you taking full advantage of tax-exempt share plans?
October 23, 2018
In last month’s newsletter, we explained why the Inclusive Ownership Fund (IOF), proposed in the September 2018 Labour Party Conference, may not be the best method of enabling workers to share in the wealth they create. We agree wholeheartedly that employee ownership can help increase a company’s productivity and encourage employees to identify more closely with the business; but there is already a good range of tax-advantaged share plans available. It is a shame that they are not more widely used!
There has been support for employee share ownership from all the main political parties for nearly 40 years. Their incentive effect is also recognised by institutional investors whose guidelines allow up to 10% of a company’s share capital to be issued for share plans every 10 years – the same percentage as proposed for IOF.
We now have tried and tested share plans which are flexible enough to reinforce most companies’ business and HR strategies. However, whilst 20 years ago (according to HMRC statistics) about 1 million employees participated in each of the approved Profit Sharing Share Schemes (now replaced by Share Incentive Plans) and SAYE Option Schemes, in 2016-17 participants in SAYE and SIPs had fallen to about 400,000 in each plan. We think that smaller companies, in particular, may have been put off by the apparent complexity of the legislation; even though MM&K have found it is possible to design share plans which are simple to administer and to communicate to employees.
Is your company taking full advantage of the opportunities to incentivise employees and provide them with valuable tax reliefs?
Using a SIP, every employee can participate up to the following annual limits:
• £1,800 of contributions from their earnings before income tax and NICs (or 10% of PAYE earnings, if less) to buy Partnership Shares
• £3,600 (2 for 1 match) in tax-exempt Matching Shares awarded by the company
• £3,600 in tax-exempt Free Shares awarded by the company, for example as part of a profit share.
In practice, only half of companies with SIPs award Matching Shares and only about a quarter award Free Shares.
Employees can contribute up to £500 per month over three or five years. At the end of this savings period, they can buy their company’s shares at a discount of up to 20% of the share price at the start. The discount is exempt from income tax and NICs.
Both SIPs and SAYE require all UK-resident employees who meet any qualifying period of service to participate and all must be offered the same terms (which can include the same percentage of salary). If these conditions are too onerous, companies may be able to use one of two ‘discretionary’ tax-advantaged share plans for employees generally:
EMI plans can be used to grant options over up to £3 million worth of shares to a company’s employees and the increase in the share value up to the exercise date is exempt from income tax and NICs and may qualify for entrepreneurs’ relief from capital gains tax.
These arrangements are available for smaller companies, with fewer than 250 employees and gross assets not exceeding £30 million, except for some excluded activities.
Options can be granted over shares worth up to £30,000 per employee and the gain on exercise is exempt from income tax and NICs.
Please contact Michael Landon if you would like to discuss in more detail how the above tax-advantaged share plans can be adapted to meet your company’s particular objectives.