Berty Plastics is an expanding manufacturer of plastic extrusions. The company wants to ensure staff retention is high and therefore wants to review its range of employee share plans. With the recent changes in share plans, what is the recommended plan to adopt?
Rewarding employees with company shares is a proven way in which to motivate staff and improve employee retention. Under the Government's new employee share ownership plan, brought into force on July 28 to replace the approved profit-sharing scheme, it is even easier for companies to set up their first all-employee share plan.
Legislation announced last week will also benefit your company, as it is in a sector that has fairly volatile share prices. This follows other legislation introduced in the summer. It allows employers to seek approval so they may make an election with employees to transfer the liability for the employer's National Insurance contributions from employer to employee.
This solves some of the accounting difficulties and helps smaller companies with cash flow.
On the more general issue of maximising the effectiveness of the plan, there are some recent developments you should consider. Esop is intended to be more flexible than its APS predecessor, allowing companies to tailor the plan to suit their business and encompass a wider proportion of their workforce.
With Esop, all employees will be able to buy partnership shares out of their pre-tax salary, up to a maximum of £1,500 a year free of tax and National Insurance (based on a maximum monthly contribution of £125). Employers can then match partnership shares by giving employees up to two free shares for each partnership share they buy.
Employers can also give employees up to £3,000 of shares each year free of tax and National Insurance. The award of these free shares can be linked to employees or teams reaching performance targets.
Employees have two choices once the shares have matured:
They can be transferred directly into the stocks and shares component of an Isa.
Investments in Isas are completely tax-free and, in addition, benefit from the payment of a 10 per cent tax credit for their first five years on dividends from UK equities.
There is no lock-in period and no minimum subscription to the Isa. The decision to make this transfer can be made at any time. The only condition is that there is a 90-day deadline following shares coming out of the plan and being transferred into the stocks and shares component of the Isa.
Shares can be kept in the Esop trust.
Partnership shares can be kept in the Esop and withdrawn at any time. Berty Plastics can, however, decide that employees forfeit their free shares if they leave or withdraw their shares within three years.
Matching shares can also be subject to forfeiture if the associated partnership shares are sold within three years of acquisition. It is important that employers make it clear to employees that the company has set a minimum holding period (this must be bet-ween three and five years).
Employees who keep their shares in the plan for this length of time and then sell immediately will not be liable for capital gains tax. If the shares are taken out and sold later, they are liable for capital gains tax but only on any increase in value after the shares come out of the plan.
For Berty Plastics, implementing the plan is the first and perhaps the most simple step for it to take. In the long term, it has to consider ways in which it can prolong interest and participation in the plan. As Esops are costly to implement and can be complicated in administrative terms, it is important for the company to maximise the benefits.
For employee communications, myshares has developed an employee portal that offers companies and their employees the ability to access a consolidated view of an employee's entitlement under different share plans.
It also facilitates the online application for shares offered under the Esop.
The employee portal is a proactive communication tool aimed at increasing the popularity of employee share plans by at least 25 per cent with added value content and links to IFAs (My Advisor) and selected brokers (My Broker).