How do employee share schemes help staff?

Arrangements designed to transfer employees part of the companies they work for will be reviewed under new government plans.

The Treasury Department will today ask companies for their views on two leading programs that offer employees a stake in their employer.

Owning a portion of a company provides employees with the incentive to better contribute to the company, and for many owners they have been a good succession planning tool.

Employee share schemes approved by HMRC are usually tax benefit schemes, both for the company offering shares and for the employees receiving them.

There are major differences between schemes suitable for small and large companies.

For smaller businesses, the Enterprise Management Incentive (EMI) scheme is the best option as it offers tax breaks and entrepreneurs can choose who is eligible to join the scheme and when.

Larger companies could opt for a Share Incentive Plan (SIP) or Save As You Earn (SAYE), both of which are being looked at by the Treasury when reviewing employee share plans.

With SIP, companies can help their employees buy shares directly or donate up to £3,600 of equity capital tax-free.

SAYE allows employees to buy shares at a discount if they save up to £500 each month for three to five years.

Capital gains tax credits are also available for each of the schemes.

The interest accrued at the end of the contract and any bonus are tax-free and participants do not pay income tax or national insurance contributions on the difference between what they bought the shares for and their market value.

In 2020-2021, 380,000 employees received SAYE stock options worth nearly £2.6 billion, while employees participating in SIP schemes received shares worth £780 million.

Victoria Atkins, Finance Secretary of the Treasury said: ‘Employee share plans are an effective way to boost staff motivation by giving people extra say in what they do – and they provide a boost to business.

“Growing the economy is a priority for this government and one way to make this happen is to make these schemes as simple as possible.”

The Ministry of Finance says it is particularly interested in whether SAYE and SIP are attractive to people with lower incomes.

How do employees benefit from share plans?

The tax benefits of SAYE and SIP are one of the greatest benefits of participating in a company’s stock plans, but they also allow employees to benefit from the success of the company they help create.

If you are new to the idea of ​​investing, joining your company’s stock plan can be a good way for you to understand it.

HMRC figures also released today show 81 per cent of companies say the schemes have boosted their business, with nearly three-quarters saying it has helped them retain and recruit staff.

While the schedules can create a sense of belonging, there are some drawbacks.

When you start investing through an employee ownership plan, the hope is that by the time you come to exercise your options, the stock will be trading above the amount you paid for it.

However, employee stock in a privately held company is much more difficult to value due to the lack of an audience for the stock.

Unlike publicly traded companies who have the price per share available through investment platforms, shareholders of private companies must use several other methods to determine the value of shares.

The lack of a public market also makes it a lot harder to sell your shares.

There’s also the argument that having all your investments tied up in the company you work for adds an extra layer of risk, especially if the company is small.

If the company is struggling, as many are in today’s environment, it could mean that you are at risk of not only losing your job, but also the money you had invested in the company.

Inexperienced investors may also buy only their own company’s stock rather than spreading their risk across a more diversified portfolio.