Tax Benefits and Obligations Across Different Tax Schemes

Understanding the complex landscape of tax benefits and obligations associated with employee share schemes is crucial for businesses and employees alike. This guide provides a comprehensive overview of the tax benefits and obligations linked to various schemes, helping you navigate employment law effectively. By understanding the tax benefits and obligations, businesses can ensure compliance and make informed decisions regarding employee share schemes.

Approved Schemes

Enterprise Management Incentives (EMI)

Tax Benefits:

Employees enjoy tax-free benefits on both the grant and exercise of options, provided they are granted at market value. A reduced Capital Gains Tax (CGT) rate of 10% applies to the sale of shares held for over two years.

Tax Obligations:

Companies must notify HMRC within 92 days of granting options and submit annual returns.
For example, an engineer receives EMI options at £5 per share. After four years, they exercise them when the shares are worth £15. Then, when they sell the shares a year later, they pay CGT on the £10 gain at 10%.

Navigating employment law and ensuring compliance with HMRC regulations are crucial in these scenarios.

Company Share Option Plans (CSOPs)

Tax Benefits:

Employees do not pay income tax or NICs on the grant or exercise of options if held for at least three years and granted at market value. They pay CGT on the gain when shares are sold.

Tax Obligations:

• Set the exercise price at market value at the time of the grant.
• Hold options for at least three years to qualify for tax benefits.

For example, an employee receives CSOP options at £10 per share. After four years, they exercise them when the share price is £20. They then pay CGT on the £10 gain when they sell the shares.

It’s essential to consult with Employment law professionals UK to ensure your schemes align with current regulations.

Share Incentive Plans (SIPs)

Tax Benefits:

Employees do not pay income tax or NICs on shares held in the SIP for at least five years. In addition, they pay no CGT on disposal if shares are sold directly from the SIP.

Tax Obligations:
Shares must be held for at least five years to gain maximum tax benefits. For example, an employee receives £3,600 in free shares under a SIP. After holding them for five years, they sell them for £5,000. They pay no income tax, NICs, or CGT. 

Tax-free benefits are vital for maximising the benefits of SIPs while ensuring employee law regulations.

Save As You Earn (SAYE)

Tax Benefits:

Income Tax and NICs: Employees do not pay income tax or NICs on the discounted share price if they exercise options after the savings period.

CGT: Employees pay CGT on any gain when they sell the shares.

Tax Obligations:

Savings Period: Employees must complete the savings period (three or five years) to benefit from tax advantages.

Example: An employee saves £100 monthly for three years under a SAYE scheme. They use the savings to buy shares at a 20% discount. After holding the shares for an additional two years, they sell them and pay CGT on the gain.

By focusing on tax-free benefits, businesses can effectively manage the financial implications for their employees.

Non-Approved Schemes

Growth Shares: 

Employees receive limited tax benefits compared to approved schemes. They pay income tax and NICs on the value of shares when they vest and pay CGT on any gain when they sell the shares.

Restricted Stock Units (RSUs): 

Employees generally do not receive tax benefits. They pay income tax and NICs when RSUs vest and pay CGT on any gain when they sell the shares.

Employee-Owned Trusts (EOTs): 

Employees do not pay income tax on bonuses up to £3,600 per year. Sellers may receive potential CGT relief, and companies can claim Corporation Tax deductions on contributions to the trust.

Each of these schemes requires careful tax-free benefits planning to ensure compliance and optimise employee share schemes.

Get Expert Guidance From Apex Accountants!

Navigating the complex tax landscape of tax schemes can be overwhelming. Let Apex Accountants guide you through the process.

Expert Advice: Our team of experienced Employment law professionals UK can provide tailored advice to help you select the most suitable scheme for your business and employees, ensuring compliance with employment law.

Compliance Assurance: We ensure your scheme is fully compliant with HMRC regulations, minimising the risk of penalties and audits.

Strategic Planning: Our expertise helps you optimise the tax benefits available to your employees, fostering a more engaged and motivated workforce through effective tax-free benefits.

Contact Apex Accountants today to schedule a consultation and unlock the full potential of employee share schemes for your business. We are here to help with everything from employment law to tax-free benefits planning. Rest assured, we’ve got you covered.