Tax and Employee Share Schemes

Our experts tell you how HMRC will tax any shares you hold in Employee Share Schemes

Our experts at DSR Tax Claims know how hard it is to find good, quality information about HMRC’s tax regulations that is easy to understand, and that’s why we have created these handy guides to tell you everything you need to know. Our aim is to make life easier for our clients and that is why we want to share our expertise with you. You can also call our friendly team on 0330 122 9972 – we’re the tax experts you can trust. Or you can check out our online calculator to see if you could be due a refund.

What are Employee Share Schemes?

Some employers offer their employees the chance to buy shares in the company as a perk of the job. Depending on the kind of share scheme offered, there can be certain tax and National Insurance advantages from buying shares in this way, for example, you might not have to pay Income Tax or National Insurance on the value of the shares.

These tax advantages only apply to certain types of share schemes. To be eligible for these tax advantages, the scheme has to be one of the following:

  • Share Incentive Plans (SIPs)
  • Save As You Earn (SAYE)
  • Company Share Option Plans
  • Enterprise Management Incentives (EMIs)

In addition, there might be certain advantages if you are an employee shareholder.

Although there might be other ways for you to buy shares as an employee, only the above types of scheme have the tax advantages of an employee share scheme.

What are Share Incentive Plans (SIPs)?

If you are given shares through a Share Incentive Plan (SIP) and keep them in the plan for at least 5 years, you won’t have to pay any Income Tax or National Insurance on the value of the shares. You also won’t have to pay Capital Gains Tax on the shares if you sell them as long as they have been kept in the plan until you sell them – if you take them out of the plan and then sell them at a later date, you may have to pay Capital Gains Tax if their value has increased. See our handy guide to Capital Gains Tax and shares for more information.

There are 4 ways you can get shares under SIPs:

  • Free shares: your employer can give you up to £3,600 of free shares in any tax year.
  • Partnership shares: you can buy the shares out of your own salary before tax is deducted. You can spend up to £1,800 or 10% of your income in any given tax year, whichever is the lower amount. You can’t buy shares over this limit.
  • Matching shares: if you buy partnership shares in a SIP scheme, your employer can give you matching shares – 2 shares for each partnership share you buy.
  • Dividend shares: if your scheme allows for it, you might be able to buy more shares with the dividends you receive from your free, matching or partnership shares. If you keep these dividend shares for at least 3 years, you won’t have to pay Income Tax.

If you take any shares out of your SIP early, you will have to pay Income Tax and National Insurance on those shares.

What is Save As You Earn (SAYE)?

A Save As You Earn scheme allows you buy shares with your savings for a fixed price. This means you can save up to £500 per month under one of these schemes. At the end of the scheme, which are usually 3 or 5 years in length, you can use the money you have saved to buy shares at the fixed price.

These schemes have a couple of tax advantages. Firstly, the interest and any bonus you receive at the end of the scheme is tax-free. Secondly, you won’t pay any Income Tax or National Insurance on the difference between what you pay for the shares and what they are worth.

If you sell the shares, you might be liable for Capital Gains Tax. However, if you put the shares into an Individual Savings Account (ISA) within 90 days of buying them, you won’t have to pay Capital Gains Tax on them. You also won’t have to pay it if you put them into a pension as soon as you buy them.

What are Company Share Option Plans?

Under this type of scheme, you are allowed to buy up to £30,000 worth of shares at a fixed price. You won’t have to pay any Income Tax or National Insurance on the difference between what you buy the shares for and how much they are actually worth. However, if you sell them you might be liable to Capital Gains Tax.

What are Enterprise Management Incentives (EMIs)?

If the company you work for has assets worth £30 million or less, it might offer Enterprise Management Incentives to encourage investment into the company. This means that the company can grant you share options up to the value of £250,000 over a 3-year period.

If you are granted share options through an EMI, you won’t have to pay any National Insurance or Income Tax if you buy the shares for at least their market value when you were granted the option. If you bought the shares at a discounted price, you will have to pay Income Tax and National Insurance on the difference between the price you paid for them and their market value.

If you sell these shares, you might have to pay Capital Gains Tax.

There are a number of companies which are excluded from offering Enterprise Management Incentive (EMI) schemes, because of the nature of the business they do. These ‘excluded activities’ are:

  • Banking
  • Property development
  • Farming
  • Ship building
  • Companies which provide legal services

What are Employee Shareholder shares?

To be classed as an employee shareholder in HMRC’s eyes, you must own shares that were worth at least £2,000 when you first obtained them. You won’t usually have to pay any Income Tax or National Insurance on the first £2,000 worth of employee shareholder shares you got before 1st December 2016. However, you won’t be entitled to any of this tax relief is you or someone you are connected to (such as a husband, wife, civil partner or business partner) have voting right of 25% or more in the company.

If you become an employee shareholder, your employer must pay for an independent expert to give you advice about the terms of the employee shareholder agreement and the effects it will have. This legal advice won’t be classed as a taxable benefit by HMRC.

Depending on when you signed your employee shareholder agreement, you may or may not have to pay Capital Gains Tax on any gains you make when you sell those shares. Before 17th March 2016, you will only pay Capital Gains Tax on shares that were worth more than £50,000 when you got them. From 17th March 2016, this changed so that you only pay Capital Gains Tax on gains over £100,000 that you make during your life time – the gain is defined as the profit you make when you sell shares that have increased in value since you bought them.

Can you transfer your shares into an ISA?

Depending on which employee share scheme you are part of, you could be entitled to transfer up to £20,000 worth of shares into a stocks and shares ISA (Individual Savings Account). The shares have to be from either a Share Incentive Plan (SIP) or a Save As You Earn (SAYE) scheme. Your ISA provider must agree to the share transfer.

If you move your shares into an ISA, you won’t have to pay any Capital Gains Tax on any profit you make from selling the shares.

The shares must be transferred into your ISA within 90 days of taking out the SIP or SAYE shares. These shares will count towards your £20,000 ISA limit – they can’t take you above that limit over all the ISAs you have.

Your employer or ISA provider will have more information about how you can transfer these shares into your ISA.

How can DSR Tax Claims help?

We aim to make life as simple as possible for our clients and that includes giving you the information you need to make your taxes (and your life) simpler and less stressful.  Our team of experts at DSR Tax Claims are always on hand to help our clients and our excellent standing with HMRC means that we can make sure you don’t fall foul of their regulations, while claiming your maximum tax rebate. We can even take care of all that paperwork and deal with HMRC on your behalf too. Call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.

This page was last updated on 26/10/2018.

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