Set up employee share schemes

Employee share schemes: advantages and disadvantages for staff


Employee share schemes: advantages for employees

Employee share schemes enable staff to benefit from the business success they're helping to create.

Share options pose no financial risk - if the market value is less than the exercise price, employees don't have to exercise the option.

Employee share schemes: disadvantages for employees

However, there are some disadvantages for employees, such as:

  • Share values could drop - risking losing the value of their shares if the business runs into difficulty, which increases their financial dependence on the business.
  • Lower salary - sometimes being expected to take a lower salary in return for receiving shares.
  • Qualifying period of service - having to stay with the company for a certain period to qualify for shares. This may tie employees to a job they would otherwise leave and may affect both their own morale and productivity and those of other workers.
  • Repaying tax on shares - leaving before the period specified in the share plan means employees lose any options/shares and may have to repay National Insurance contributions (NICs) and income tax relief.
  • Tax payments on unapproved share schemes - having to pay income tax and NICs when they acquire shares in a taxed (unapproved) share scheme even if they haven't got enough money to do so without selling some or all of the shares. In addition employees of private companies may not be able to sell the shares easily to raise the money.
  • Restrictions - having to pay income tax and NICs each time a restriction is changed or removed if their shares are in an unapproved share scheme which carries certain restrictions.

Tax advantages for HMRC approved share schemes

Employees participating in tax-advantaged share schemes - ie those approved by HM Revenue & Customs (HMRC) - don't pay income tax or NICs when they acquire the shares.

Under a share incentive plan there is no Capital Gains Tax as long as the employee sells their shares as soon as they are removed from the plan - see HMRC approved share schemes.

Dividends on plan shares may be reinvested tax-free in further plan shares.

  • HMRC Employment Related Securities Helpline
    03000 322 7074