Employee Share Schemes
The UK currently has 4 main schemes for direct employee share ownership, also known as employee share schemes (ESS). The total number of companies operating an Employee Share Scheme increased by 11% since 2015-6 to 11,850 in 2017.
The Equity Project’s proposals intend to build upon existing government schemes.
Share Incentive Plan (SIP)
Under a share incentive plan (SIP), an employer can award shares to its employees for free, or employees can purchase shares on a tax-favoured basis. Under a SIP, workers must keep their shares in this plan for 3 to 5 years to forgo income tax and national insurance on their value, and capital gains tax does not apply until the sale of these shares if their value have increased.
There are 4 ways, under SIPs, in which employers can distribute equity:
Þ Free shares: Workers can only receive up to £3600 of free shares each tax year.
Þ Partnership shares: Workers can purchase up to £1800 or 10% shares (whichever is lower) from their salary before any tax deductions.
Þ Matching shares: Workers can receive up to 2 free matching shares for partnership purchased.
Þ Dividend shares:Workers may be able to buy more shares with dividends receive from free, partnership or matching shares.
Save as Your Earn (SAYE)
Under a share incentive plan (SIP), an employer can award shares to its employees for free, or employees can purchase shares on a tax-favoured basis. Workers can save up to £500 per month in the scheme for 3 or 5 years at which time they are able to purchase the shares.
This prevents any rapid form of development and has the potential to significantly reduce the quality of life of workers during the saving period when a potentially significant proportion of their salary is removed. While there are the advantages of the interest and bonus at the end of the scheme is tax free, and income tax and national insurance are not paid of the difference between the shares and what they are worth.
Enterprise Management Incentives (EMI)
A tax advantaged share plan for key employees in which employees are allowed to be granted share options up to the value of £250,000 over a three year period. Must be bought for at least the market value to surpass the income tax or national insurance. Certain industries have been determined to not be allowed to exercise EMIs: Banking, Farming, Property Development, provision of legal services and ship building.
Since its introduction in 2003 the Enterprise Management Incentive has been a success. The scheme gives SMEs a chance to attract and keep talent while rewarding company performance and avoiding large cash sales. Yet despite the onus placed upon enterprise to provide economic growth there has been virtually nothing to promote EMIs.
Company Share Option Plan (CSOP)
Under this scheme employees would have the option to purchase up to £30,000 worth of shares at a fixed price, without having to pay Income tax or national insurance contributions on the difference between the stated price of the shares and their value. This also shifts control to the employees as to the value of shares each employee may purchase, allowing for the potential inequality of workers at the same level. As their initial financial capability is determining the level of benefit they can receive.