Employee Share Schemes: What are They and How are They Beneficial?

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Photo Credits: Allison Saeng via Unsplash

Gone are the days when employee benefits were limited to free pizza or casual Fridays. Now, in addition to employee benefits being set up to motivate and retain employees, they are another way of securing an employee’s future such as pension schemes and share schemes.

Employee share schemes are a great way to make employees feel like they are a part of something. In such schemes, a portion of the company shares are offered to employees at a cost. What happens after the share is acquired by an employee depends on the kind of share scheme set up.

While every employer may not feel like this is a must-have in the company, having an employee share scheme makes an organisation all the more attractive for the best talent.

Why Launch an Employee Share Scheme?

Hooray Insurance, a financial planning and employee benefits broker, reported that 8 in 10 employees consider the benefits package offered when joining a new company. In fact, 55% of employees would even consider moving jobs if the benefits were better.

employee share schemes and its benefits

When share schemes are part of the benefits package, employees are offered equity in the company which can attract the best talent. Moreover, it’s not just attracting talent but retaining them, which is possible with a share scheme. Studies show that employees feel more connected to the workplace which improves motivation and productivity.

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Additionally, share schemes are beneficial for employees from a tax perspective and act as a great alternative if salary raises are not possible. However, it is important to remember that these schemes need to be structured well and may not always be possible to set up for many companies.

Different Types of Share Schemes

Share Incentive Plans (SIP)

This is one of the most straightforward plans that allow employees to own shares in a company tax-free (for five years). It may also be possible to cash out the shares in the company after three or five years, depending on the terms set. Remember the longer the shares are part of the plan, the lesser tax and NIC you are likely to pay when you cash them.

There are four types of share schemes –

  1. Free Shares – Employees are given free shares worth up to £3000. While employees won’t have to pay for it, it’s possible that the allocation of the shares may be related to work performance.
  2. Partnership Shares – Employees use their pay before tax to buy shares in the company. UK law states the limit is either £1800 or 10% of your income (whichever is lower)
  3. Matching Shares – Employers match the shares bought by employees (up to two free shares)
  4. Dividend Shares – Dividends from free, partnership or matching shares can then be used to buy more shares if the employer allows it. Employees will not have to pay income tax as long as they keep the shares for at least 3 years.

Company Share Option Plan (CSOP)

Under this plan, employees are given the option to buy up to £60k worth of shares and enjoy advantages like no income tax or NICs. Employees are typically offered the shares at a discount compared to the current market price.

However, there is something called a “vesting period” where the employees need to be with the company for a period of time, to then be eligible for this.

Save As You Earn Share Schemes (SAYE)

Employees with a SAYE scheme can choose the amount they want to save everything and that is then deducted from their salary. After saving money for three, five or seven years, the employees can either use the money to buy shares and become a shareholder. They can also withdraw the money and any interest earned, instead of buying shares.

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Enterprise Management Incentives (EMI)

An attractive option for smaller businesses with less than £30m in assets. If such a plan is set up, then the employer can grant share options worth up to £250,000. Employees will have to remain with the company for a period of time that can be between three to five years, after which employees can decide how they want to deal with the shares.

FAQs on Share Schemes

Q1. When Can an Employee Sell Their Shares?

This entirely depends on the scheme. Most schemes have certain restrictions or lock-in periods where the shares can’t be sold (which is likely to be 3-5 years) while some schemes have no such restrictions. More information can be found with the employer and within the scheme rules.

Q2. How Much Discount Do Employers Offer for Share Prices?

There is no specific amount for how discount is offered but usually it is 10-20% less than the market price. Factors like market price, company value and industry standards also play a part in this.

Q3. Are There Any Tax Benefits for Companies Who Have Share Schemes?

Schemes like EMI tend to have tax benefits for both the employer and employee as the company can be eligible for tax deduction. However, it depends on the scheme and it’s best to thoroughly research a share scheme before setting it up or signing up for it.

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