Employee share schemes: everything you need to know

These five work-based share plans allow you to invest in your future while also saving tax.

Save As You Earn (SAYE or Sharesave)

With SAYE you save a set amount each month for three or five years and can then use this lump sum to buy discounted shares.

What you'll pay for those shares (the exercise price) is fixed at the start of the contract and can be up to 20% below the prevailing market price when you are given the option to buy the shares.

You can save from £5 to £500 a month into SAYE from your after-tax pay. 

At the end of each SAYE plan, savers can buy the shares and then keep or sell them. If their exercise price is below the market price, then savers usually decide to take back their cash savings as a lump sum. There is no Income Tax or National Insurance to pay on any profits you make (capital gains) from SAYE share sales. Also, there is no Capital Gains Tax (CGT) to pay on shares transferred into a tax-free ISA or pension within 90 days of exercising your option.

Otherwise, any CGT payable on gains from SAYE share sales can be offset against your CGT allowance, which is £11,000 in the 2014/15 tax year. Most people making profits from SAYE pay no CGT at all. You can also gift shares to your spouse so as to take advantage of their CGT allowance.

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Share Incentive Plans (SIPs)

Through an all-employee Share Incentive Plan, your employer can give you free shares or offer you extra shares free when you buy shares through your payroll. These contributions are taken from your before-tax salary, so you avoid Income Tax and National Insurance on these SIP deductions. There are four ways to gain shares through SIPs:

• Free shares: Your employer can give you up to £3,600 of free shares in any tax year. 
• Partnership shares: You buy shares out of your before-tax salary, up to a limit of either £1,800 or 10% of your income in each tax year, whichever is lower. 
• Matching shares: Your employer can give you up to two free matching shares for each partnership share you buy. In effect, this could triple the number of shares each contribution buys.
• Dividend shares: You can buy more shares by reinvesting the cash dividends you get from free, partnership or matching shares. This applies only if your employer’s shares pay dividends and the scheme allows dividend reinvestment.

Buy SIP shares and keep them inside your plan for five years and you won’t pay income tax or National Insurance on their value. You also won’t pay CGT when selling shares if you keep them in your plan until you sell them. If you remove them from your SIP and sell them later on, then you may have to pay CGT if their value has increased. You won't pay Income Tax on dividend shares kept inside your SIP for at least three years.

Company Share Option Plans (CSOPs)

Company Share Option Plans (CSOPs) give you the option (but not the obligation) to buy up to £30,000-worth of shares at a fixed price, known as the strike or exercise price. This price must be at or above the market price at the grant date. CSOPs are discretionary plans, so they may be offered only to certain employees or directors, and can be linked to performance targets.

The maximum value of approved options per individual is £30,000 in total at the date of the grant. Any options granted above this limit will be unapproved and not eligible for favourable tax treatment. Shares bought using approved CSOPs between three and 10 years after the grant date are free of Income Tax and National Insurance. The usual CGT rules apply when selling CSOP shares that have gained in value since the grant date.

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Enterprise Management Incentives (EMIs)

If you work for a trading company with gross assets of £30 million or less, your employer may offer you an Enterprise Management Incentive (EMI). Companies in certain excluded activities aren’t allowed to offer EMIs, such as banking, farming, property development, provision of legal services and shipbuilding.

Under an EMI, your employer can grant you options over shares at a market value of up to £250,000 at the date of grant. Usually, there will be no Income Tax or National Insurance to pay on the difference between the exercise value and the market value when you exercise an option within 10 years of the grant date. The usual CGT rules apply when selling EMI shares that have gained in value since the grant date.

Employee Shareholder Shares

Employee Shareholder Shares (ESSs) is a share scheme increasingly popular with small and fast-growing companies. ESSs give selected employees greater incentives and rewards through direct ownership of shares in a business.

In return for giving up certain employment rights (such as the right to statutory redundancy pay, protection from unfair dismissal and flexible working), a company may issue free shares worth anything from £2,000 to £50,000 to a Shareholder Employee.

Generally, Employee Shareholders will pay Income Tax on part of the shares’ value on acquisition and may also have to pay National Insurance if the shares are 'readily convertible assets' (such as shares listed on a recognised exchange). However, when calculating this tax liability, it is assumed the Employee Shareholder paid only £2,000 for these shares.

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So for a share award of £50,000, only £48,000 is taxable. When Employee Shareholders sell, gift or transfer these shares, they do not have to pay CGT on any gains.

Sell as you go

By using one or more of these five schemes, you can end up owning large numbers of shares in your employer's business, all while avoiding tax. Should you do so, it may be wise to sell some shares as you go. If your company gets into trouble, so might your employee shares.