Set up employee share schemes

Taxed employee share schemes


If HM Revenue & Customs (HMRC) tax-advantaged (approved) share schemes don't match your commercial objectives, there are alternative share schemes.

For taxed employee share schemes, gains are generally subject to tax payments including Income Tax and National Insurance Contributions (NICs), deducted under the PAYE (Pay As You Earn) system.

There is greater flexibility with taxed employee share schemes. Any type of share or other financial securities can be used and you can impose whatever conditions you want to deliver your commercial objectives.

Taxed share-option plans

This is similar to a tax-advantaged share-option plan such as company share option plan (CSOP) or enterprise management incentive (EMI) - see HMRC approved share schemes. But there are no limits on the amount or value of options given. In very limited circumstances where the shares aren't readily saleable, no NICs are due.

Phantom share option plans

Phantom share option plans are cash bonus plans.

The bonus is determined by the increase in value of a specified number of shares covered by the option. It's usually the difference between the market value of the shares when the scheme matures and their value at the outset.

The bonus is subject to Income Tax and NICs. No shares are transferred or issued.

The business gets Corporation Tax relief on payments made under the plan.

Long-term incentive plans

This is a generic name for a plan that aims to provide incentives to employees over the long term, usually a year or more, via rewards linked to shares or securities.

Such plans could involve the award of shares, the grant of share options or it could be a cash bonus scheme that tracks movements in securities. In one common type of long-term incentive plan, employees are given free shares that are held in a trust until specified conditions are met.

When employees get the shares, they're subject to Income Tax and NICs, even though they may then be held in trust for a period of time.

If employees risk losing shares because certain conditions aren't met, Income Tax and NICs may be deferred until these conditions are removed or met.

Alternatively shares may be awarded to employees if they meet certain performance criteria.

Income Tax and NICs arise on the value of the shares when they are actually acquired by the employee.

  • HMRC Employment Related Securities Helpline
    03000 322 7074