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Employee Share Schemes

Following last year&#39s Budget the Chancellor issued a consultation document on the introduction of a new type of all-employee share scheme. The motives behind the scheme are the same as others, to incentivise employees through ownership of shares in their own companies. The tax breaks proposed will, potentially, be more generous than the existing savings related and profit related share schemes. Further details were given in the pre-Budget report issued in November .

In this year&#39s Budget the proposed details of the new scheme were confirmed to be aimed at supporting companies&#39 own efforts to foster a more productive relationship with their employees. It was stated that the new scheme will be the most tax-advantaged all-employee share ownership scheme ever introduced in the UK and will provide greater flexibility than the current scheme to meet the needs of companies and employees. Under the plan it is expected that more than 500,000 employees will own shares in their company for the first time. It is proposed that shares held in the plan for 5 years will be completely free of tax, NICs. As a result the current approved profit sharing scheme will be phased out from 2002. However, the rules for the SAYE share save and the Company Share Option Plan will remain as they are.

The details of the new plan are as follows:

Free shares:

– employers can give up to £3,000 of shares each year to employees free of tax and NICs; and

– employers will be able to award some or all of these shares to employees for reaching their performance targets – rewarding personal, team or divisional performance.

Partnership shares:

– employees will be able to buy shares out of their pre-tax monthly salary or weekly wages up to a maximum of £1,500 a year with an earnings cap of 10% and a monthly limit of £125, free of tax and NICs.

Matching shares:

– employers can match partnership shares by giving employees up to 2 free shares for each partnership share they buy.

More generally:

– employees who sell their shares will be liable to capital gains tax only on any increase in the value of their shares after they come out of a plan;

– shares must come out of the plan when employees leave and some employees may lose their free and matching shares if they leave their job within three years of getting the shares;

– dividends of up to £1,500 paid each year on the shares will be tax free, provided they are used to acquire additional shares in the company; and

– employers will secure a deduction in computing their taxable profits for the costs of setting up and running the plan and the value of shares used in the plan.

Under the proposals announced, the tax treatment for all types of shares within the plan is aligned so the plan will be simpler to operate and easier to communicate:

– no withdrawal of free or matching shares within the first 3 years will be possible

– employees who take their free and/or matching shares out of a plan after three years but before 5 years will pay income tax and NICs on no more than the initial value of the shares – any increase in the value of their shares while in the plan will be free of income tax and NICs.

– partnership shares can be withdrawn within 3 years but will be subject to income tax and NIC on their market value.

– employees who keep their shares in a plan for five years pay no income tax or NICs on those shares;

– when shares come out of the plan their market value at that time forms the base cost for future CGT calculations

As mentioned earlier this new share scheme will not be the only one available, what follows is a brief summary of the existing approved schemes and their future.

The Schemes:

– SAYE Sharesave (or SAYE) – employees are granted options at a discount of up to 20% at the start of a savings contract. Employees can save a fixed monthly amount of between £5 and £250 for 3, 5 or 7 years. At the end of the savings contract a tax-free bonus is payable. Employees use the proceeds of the savings contract, including the bonus, if they want to exercise the option. If they do not, the proceeds are repaid in cash, tax free. There is no tax or National Insurance charged on the discount or on the gain made when the option is exercised.

– Company Share Option Plan (CSOP) – employees are granted options to acquire shares at the market price at the time of grant. Employees may be granted options over shares worth up to £30,000 at any one time. There is no tax or National Insurance charged on the gain made when the option is exercised, provided that the options are held for at least 3 years and there is a gap of at least 3 years between each tax-relieved exercise.

– Approved Profit Sharing (APS) – employees are awarded free shares up to the value of £3,000 a year or up to 10% of salary up to a maximum of £8,000, whichever is greater. The shares must be left in a trust for 2 years but can be taken out after 3 years free of tax and National Insurance.

Their future:

– SAYE Sharesave (SAYE) and the Company Share Option Plan (CSOP) are to continue unaltered

– No further tax free awards can be made under the Approved Profit Sharing (APS) from April 2002

– Provisions in the Finance Bill will prevent the use of the APS and the new plan in arrangements designed to replace Profit-Related Pay rather than give employees a continuing stake in the business

Over 1,200 companies have an SAYE scheme and around 1.75 million employees participate in these. This scheme currently costs in the region of £600 million a year. Around 3,750 companies have a CSOP with some 450,000 employees holding options. CSOP costs in the region of £130 million a year. Fewer than 900 companies have an APS with some 1.25 million participants. It is expected that the vast majority of companies with APS schemes will replace this with the new plan.


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