Staff benefits: Have you considered share options?

Find out how to motivate your staff by giving them a sense of ownership.

Employees work harder if they are given a sense of ownership. However small a share of the wealth created is offered, staff are likely to be more motivated and more interested in business performance issues. There are three Inland Revenue approved share schemes to chose from, all with tax breaks:

  • Approved Profit Sharing (APS). A trust set up to buy shares in the company and allocate these to participating employees. The company makes tax-deductible payments into this trust. Shares have to remain in trust for at least 2 years, plus they’re free of income tax if left in for another year.
  • Save As You Earn (SAYE). Employees enter a 3-5 year contract to save a fixed monthly sum. This can range from £5-£250. They receive a tax-free bonus at the end of the contact – which is set by the treasury and equivalent to the fixed interest rate. The employee doesn’t pay income tax on any increase in share value.
  • Company Share Option Plan (CSOP). The company gives employees the option to buy shares at a future date, but at the current market price. Share options can be worth up to £30,000 at any one time, and no tax is charged on the increase in share value between option and allocation. To qualify for this tax break, options must be held for at least three years.

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APS and SAYE must be made open to all staff employed for five years – including part-timers. CSOPs are discretionary. You can set up a non-approved scheme, but you won’t get the tax breaks.

In his pre-budget report on 27 November 2002, Gordon Brown unveiled two major changes that will have a significant impact on the way in which employee share schemes and trusts are taxed.

The change means the employer will be able to obtain a tax deduction for the market value of any shares in the company acquired by the employee. The tax relief will be reduced in proportion to any amount that the employee themselves contributes towards purchasing the shares.

Should any business make the decision to set up employee benefit trust for shareholding employees and associates, the law has changed on whether or not that business can apply for tax relief.

You can now only apply for tax relief on payments from such trust to your employees, if the payments are subject to standard tax and national insurance contributions

This means that should you set up a trust to provide, for example, mobile phones or computers to all your employees, rather than a straightforward money payment, you would not be eligible for this tax relief.

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As you can see the tax issues surrounding these schemes are complex to set up and at present still unclear. You may well need more info and advice. Try the Inland Revenue Inquiry service on 020 7438 6420/1/2/3/4/5


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