Quick Insights: How Are Employee Share Schemes Taxed?

Navigating the tax implications of Employee Share Schemes (ESS) is crucial for any UK startup looking to implement this rewarding system. Understanding how these schemes are taxed can help you maximise their benefits both for your company and your employees. Let’s explore the tax aspects of popular ESS options like the Enterprise Management Incentive (EMI), Save As You Earn (SAYE), and Share Incentive Plans (SIPs).

Taxation of ESS in the UK

The tax treatment of ESS varies depending on the type of plan implemented. Here are the key points for some common schemes:

1. Enterprise Management Incentive (EMI):

   • Granting of Options: No tax or National Insurance contributions (NICs) are due on the grant of EMI options.
   • Exercise of Options: Employees may pay Capital Gains Tax (CGT) on gains, but there is typically no Income Tax or NICs if the exercise price is at least equal to the fair market value at the time of the grant.
   • Sale of Shares: CGT applies to the difference between the sale price and the exercise price, potentially eligible for Entrepreneurs’ Relief.

2. Save As You Earn (SAYE):

   • Granting and Exercise of Options: Options are granted at a discount, and no tax or NICs are charged on the grant or exercise of SAYE options.
   • Sale of Shares: Employees are subject to CGT on any gains from the sale of shares acquired through SAYE.

3. Share Incentive Plans (SIPs):

   • Acquisition of Shares: No Income Tax or NICs on shares acquired up to certain limits.
   • Dividends on Shares: Dividends may be reinvested to purchase further shares, often without Income Tax or NICs.
   • Sale of Shares: If shares are held within the plan for at least five years, no Income Tax or NICs on their value at the time of acquisition; however, CGT may apply on any increase in value when the shares are sold.

Tax Planning Considerations

Effective tax planning is essential when implementing an ESS. Considerations include:

• Timing of option exercise and share sales to manage tax liabilities.
• The impact of tax rates and bands on employees.
• Utilising available reliefs, such as Entrepreneurs’ Relief, to minimise CGT.

The Bottom Line

Properly managing the tax aspects of Employee Share Schemes is vital for leveraging their full potential. By staying informed about tax requirements and planning strategically, you can make ESS a powerful tool for employee motivation and retention, while also managing financial liabilities effectively.

As you consider implementing or revising an Employee Share Scheme, it’s also essential to understand the different types of schemes available and which one best suits your business goals and the needs of your employees. Stay tuned for our next Quick Insight, “Overview of ESS Types & Their Suitability,” where we will break down the various schemes to help you choose the right one for your startup.