Because the exercise price is often fixed at the time the share options are granted, the theory is that employees will be incentivised to work harder to improve company profitability. Therefore, increasing the share price, whilst allowing them to purchase the shares for a lower cost than their new value, will lead to them making a profit.<\/p>\n
Although share options are often used as part of a benefits package for employees, e.g., as an alternative to a bonus scheme or a higher basic salary, they are sometimes also granted to company directors or third-party investors. But it\u2019s the schemes for employees that are most often discussed in relation to share options, as these can also provide tax benefits.<\/p>\n
What are the main share option schemes available?<\/h3>\n
There are three main types of share option schemes for employees:<\/p>\n
Enterprise Management Incentives (EMIs)<\/h4>\n
Enterprise Management Incentive<\/a> schemes (EMIs) allow a company to grant options up to the value of \u00a3250,000 for each individual employee, calculated over a three-year period.<\/p>\n Employees granted the options will be entitled to exercise their options, i.e. purchase a specified number of shares at a fixed price, upon a \u2018trigger\u2019 event. Examples of trigger events are:<\/p>\n EMIs are available to companies whose assets are not in excess of \u00a330 million. Furthermore, there should be fewer than 250 employees.<\/p>\n What are preference shares and should I issue them?<\/span><\/a>\n \n EMIs are discretionary, meaning that they do not need to be offered to all employees. Companies cannot offer EMIs if they are involved in any of the following \u2018excluded activities\u2019:<\/p>\n There is no Income Tax or National Insurance (NI) payable on EMI options, as long as the shares are purchased for at least the market value they had when the option was granted. However, if there is a discount on the market value, Income Tax, and NI needs to be paid on the difference.<\/p>\n The cost of setting up and administering the EMI scheme is classed as an allowable business expense – so Corporation Tax relief will be available.<\/p>\n Save As You Earn<\/a> (SAYE) schemes, also called \u2018savings related share option schemes\u2019 or ‘sharesave,’ are designed to allow employees to save money tax-free in order to purchase company shares.<\/p>\n SAYE works in tandem with share options which are granted by the company. The scheme is not<\/strong> discretionary; it must be offered to all eligible employees and company directors.<\/p>\n Under the scheme, employees can save up to \u00a3500 per month as part of a \u2018savings contract\u2019 which lasts for either 3 or 5 years. Once the fixed period of the savings contract has finished, employees can then exercise their option to purchase shares at a fixed price.<\/p>\n Save 40% on our Fully Inclusive Package - limited time only special offer<\/span><\/a>\n \n No income tax or NI is payable for the difference between the market value of the shares and the fixed price at which they were purchased.<\/p>\n Furthermore, any bonus or interest received under the savings contract is free of tax. But there may be Capital Gains Tax<\/a> (CGT) to pay if the shares are later sold unless they are transferred into (i), an Individual Savings Account (ISA) within 90 days of purchase, or (ii), a pension immediately upon purchase.<\/p>\n\n
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\n <\/a>\n <\/div>\n \nSave As You Earn (SAYE)<\/h4>\n
Company Share Option Plan (CSOP)<\/h4>\n
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