Share options are also known as employee stock options and they are, simply put, shares given to employees as part of their remuneration package. This is a popular practice as it incentivises employees to do well because an increase in the company’s performance will obviously lead to an increase in the company’s share price and thus the value of the stock asset held by the employee.
This is beneficial for both parties as the employee could receive more than they would if they were simply being paid cash and the employer could save money if the company’s financial performance does not match forecasts. It also helps to keep employees tied down to a particular employer for the long term.
Usually if an employee acquires shares there is income tax charged on the purchase if they are bought for below market value. There are different more tax beneficial types of share options and the most common are explained below, each with their own tax saving benefits, particularly with Capital Gains Tax which is applicable to the sale of shares. For this reason they are known as “approved plans”.
A Share Option Plan
Under a standard share option plan employees are given the right to buy shares in the future but at their current price. This means that if the company’s shares increase in price before the option is exercised they will make a profit immediately. Usually only selected employees can enter into a share option plan but it can be made available to all employees.
Typically the option should be exercised between three and ten years and an employee can hold up to £30,000 (based on the market value at the time of the grant). With share options there is no Capital Gains Tax on the profits nor is there any National Insurance Contributions (NICs). Any shares held over the £30,000 will not benefit from the tax savings.
Save As You Earn (SAYE) / Sharesaver Schemes
Under a sharesaver scheme employees are given the optional right to by a number of shares (usually at a below market price) from savings after three, five or seven years. If the shares rise in value employees can make a profit immediately. Under a sharesaver scheme employees are not obliged to exercise the option to buy the shares and can instead chose to take their savings instead. The scheme does have tax advantages but needs to be approved by Her Majesty’s Revenue and Customs (HMRC) first.
Employee Share Ownership Plans / Company Share Option Plan (CSOP)
Under these arrangements employers put shares into a trust and employees can benefit from up to £3,000 worth of shares a year. Employees can further benefit from the fact that these shares are free of Capital Gains Tax and Income Tax provided they are held in trust for over five years. Such schemes can be quite restrictive in that they need to be available to all employees and will also require prior approval from HMRC.
Enterprise Management Incentives (EMI)
Under an EMI, employees are given the option to purchase up to £100,000 of standard shares in the company as long as the employer does not at any one time have more than £3,000,000 worth of shares in EMIs. Not any company can grant EMI options and in order to meet with the criteria the company must have fewer than 250 employees and £30,000,000 worth of gross assets.
There are other schemes available to employees, including unapproved schemes which do not have many tax benefits. Share options are a useful alternative to traditional remuneration but they can be both complex in nature and have complex tax implications. Before entering into them you should ensure that you are aware of how they operate which can be explained to you both by your employer and HMRC.
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