Are all-employee share schemes due for a revival?
October 7, 2021
The two principal all-employee share schemes available in the UK are Sharesave and Share Incentive Plans (SIPs). Participants in Sharesave schemes (sometimes called savings-related share options) are granted share options over the number of shares which can be acquired, for a price per share up to 20 per cent lower than the market price per share at grant, from the proceeds of a three or five-year savings contract. Savings between £5 and £500 per month are deducted from monthly after-tax pay. Gains on option exercise at the end of the contract are not subject to income tax or National Insurance contributions (NICs) and there is no CGT if shares are sold immediately. If the option is not exercised, the accumulated savings are returned to the employee, without interest.
SIPs also carry tax advantages. Using pre-tax, pre-NIC income, participants can purchase Partnership Shares worth up to £1,800 annually, so the cost of acquiring Partnership Shares is effectively subsidised by HMRC. Employers may offer up to £3,600 worth of Matching Shares to participants who acquire Partnership Shares. Whether or not participants acquire Partnership Shares, employers may award up to £3,600 worth of Free Shares annually. Each participant may, therefore acquire up to £9,000 worth of shares per year. If shares are held within the SIP for 5 years, there are no tax or NIC charges when they are withdrawn and no CGT if shares are sold immediately.
Corporation tax relief is available for the value of Matching and Free Shares awarded and on option gains through Sharesave.
Despite attractive tax advantages, which are enshrined in legislation, both Sharesave and SIP have been in decline. Last month’s survey published by ProShare reveals only 17 new Sharesave schemes were introduced in 2020 (the lowest since 2013) and at 279, the number of annual invitations or new grants was the lowest for many years. The number of new companies offering SIP for the first time was seven in 2020. The average employee contribution (to acquire Partnership Shares) fell to £72.38.
Reasons for this decline include:
- the removal of interest on amounts saved under Sharesave (paid in the form of a bonus representing additional monthly contributions depending on the type of savings contract)
- reduced levels of net spendable income as the pace of wage rises slowed
- lacklustre performance of the FTSE 100 over the past 5 years (although the FTSE 250 has fared better over the same period)
- the greater complexity of SIP over Sharesave, which may not, perhaps, have been adequately balanced by communicating the benefits of being able to acquire Partnership Shares using pre-tax, pre-NIC income or the Matching and Free Share elements, through which participants can acquire more shares at no additional cost
- companies which qualify under the Enterprise Management Incentive (EMI) or Company Share Ownership Plans (CSOP) legislation can use those plans to offer tax-advantaged equity participation to substantially all employees, although participation in those schemes tends to be limited
Here are three reasons why all-employee share schemes might, nonetheless, be due for a revival:
- Encouraging economic news:
The Treasury forecasts UK GDP will grow 6.9% in 2021 and 5.6% in 2022, settling to around 2% in the medium-term thereafter. The Public Sector Borrowing Requirement (PSNB) is expected to peak at £172.3bn this year and to reduce thereafter to about £79bn in 2025. Whilst RPI is forecast to reach 4.5% on the fourth quarter of 2021, reducing thereafter. The rate of unemployment is also forecast to fall to about 4% in the medium-term, from a peak of 5.4% and the medium-term projection for claimant unemployment (the number of people claiming benefits principally because they are unemployed) hovers around 1.5%.
Recent press comment suggested a long-term demand for oil and that the price per barrel will reach and sustain $80 plus – a fillip for jobs in the oil sector. Despite uncertainties about economic forecasts and concerns about “lies, damned lies and statistics”, there is a sense that the journey out of COVID is making progress and that the economy will tag along for the ride. Assuming the stock market follows suit, shares are likely to become more attractive, particularly if they can be purchased at a discount and on tax-advantageous terms through employee share schemes.
- Proposed UK tax changes
From April 2022, the UK Government proposes to introduce a new tax to support the NHS. For a year, the rates of employee and employer NICs will be increased by 1.25%, thus adding 2.5% to employment costs. From 2023, the new charge will be levied as a separate health tax and NIC rates will fall back to normal levels. It is expected that existing NIC reliefs will apply to the new levy.
More details are likely to emerge in the Spending Review on 27 October but, assuming existing reliefs apply as expected, it should become more cost-effective to acquire SIP Partnership Share using per-tax, pre-NIC income and to receive shares through both Sharesave and SIP free of income tax and NICs.
- Employee engagement
The need for and benefits of, an engaged workforce have become more apparent during the pandemic. All-employee share schemes provide employers with an opportunity to engage with the whole workforce through equity participation, thus creating a common sense of ownership and purpose.
The acquisition of shares is not a risk-free investment. However, through the Free Share element of SIP, employers can enable employees to acquire shares at no cost. The discounted acquisition cost available through Sharesave and the ability to acquire SIP Partnership Shares using pre-tax, pre-NIC income both provide an element of stop-loss protection.