How to choose employee incentive schemes to save tax?

Many companies offer Tax Advantaged incentive schemes to employees as part of long-term incentive plan. These include:

 

  • Share Incentive Plans (SIP)
  • Save As You Earn (SAYE)
  • Company Share Option Plans (CSOP)
  • Enterprise Management Incentives (EMI)

 

Share Incentive Plans (SIP)

Employees can buy their employer companies’ shares with their gross salary, meaning they will not pay income tax and NIC on that part of their salary used to buy these shares. This limits to £150 per month (£1,800 per annum).

For a higher rate tax-payer, the benefits accumulate from

  • Saving 40% income tax and 2% NIC
  • Matching shares – companies can match up to 2 shares for each share you buy, also tax free
  • Dividend shares – when the above shares pay dividend, it can be used to buy more shares, still tax free
  • No capital gains tax when selling the shares when conditions are met

Out of the available amount of £1,800 per annum, not participating in SIP will give you a net salary of £1,000, but participating can give you £3,600 in shares, a net benefit of £2,600 per annum.

 

Save As You Earn (SAYE)

Employees can put away up to £500 per month (£6,000 per annum) of gross salary into saving via a special contract with an option to purchase shares for a period of 3 or 5 years, and exercise the option at the end of the period to purchasing the shares. The benefits are:

  • Saving 40% income tax and 2% NIC
  • Companies can offer up to 20% price discount to purchase the shares
  • A cash bonus at the end of the 3 or 5 years
  • No capital gains tax when selling the shares when conditions are met

 

Company Share Option Plans (CSOP)

Employers can grant employees options to purchase up to £30,000 worth of company shares without paying income tax and NIC. The option needs to be exercised between 3 to 10 years. Unlike the above two schemes, this one is discretionary, and the employers can choose which employees to grant the shares to. The benefit is saving on income tax and NIC. However, Capital gains tax will be due when selling the shares at 10% or 20% after the annual allowance of £12,300 (2021-2022).

 

Enterprise Management Incentives (EMI)

This is the most generous scheme in terms of tax. The employers can grant employees options to purchase up to £250,000 worth of company shares over a 3 year period. No income tax and NIC are payable at the grant and exercise of the option, but capital gains tax will be due at selling of the shares, however at the lower rate of 10%.

Only smaller companies with assets less than £30m and employees less than 250 qualify for this scheme.

 

Comparisons of schemes

 

Looking through the four schemes, first question is: should I take part of any of the schemes? The answer is almost certainly yes, as they all provide tax advantage. However, EMI only applies to smaller companies. CSOP is discretionary and not necessarily open to every employee. SIP and SAYE are normally available to all employees. If your employer offers both to you, and you can afford to put cash away, then participate in both. If you can participate in only one, below is the comparison of the benefits of the two schemes.

Annual Limit
Annual limit worth of Net salay if not taken any plan
SIP Share worth -Employer match 2 shares per share by employee
SIP Share worth -Employer match 1 shares per share by employee
SIP Share worth -Employer match 0.5 shares per share by employee
SIP
1,800
1,044
5,400
3,600
2,700
Net Benefit
5400-1044=4356
2,556
1,656
SAYE
SAYE Share worth-share price discount 20%
SAYE Share worth-share price discount 10%
SAYE Share worth-share price discount 0%
6,000
3,480
7,500
6,667
6,000
Net Benefit
4,020
3,187
2,520

 

The available amount of SAYE (£6,000 per annum) is higher than SIP (£1,800 per annum), therefore the total saving in tax is usually higher than SIP, except when the employers match 2 shares per each share that employees buy. For example, out of the available amount of £6,000 per annum, not participating SAYE will give you a net salary of £3,480, but participating can give you shares worth £7,500 in market value, a net benefit of £4,020 per annum.

 

Exit the schemes/Conditions to be met

 

For SIP, if you take shares out of the SIP within 5 year period, income tax and NIC might be due, for example, if you resign from the company and have to exit the plan. However, if you leave the company by being made redundant, you will not need to pay income tax and NIC on the shares. You will not have to pay Capital Gains Tax, either.

 

For SAYE, your employer can make the contract either 3 or 5 years, if you exit the scheme before 3 or 5 years, income tax and NIC might be due, for example, if you resign from the company and have to exit the plan. However, if you leave the company by being made redundant, you will not need to pay income tax and NIC on the shares.

You will not pay Capital Gains Tax when selling the shares if you put them into either ISA, or your pension.

 

For CSOP, no income tax and NIC will be due at the grant and exercise of the options, as long as the options are exercised between 3 to 10 years of grant. CGT will be due on sale of shares.

 

For EMI, no income tax and NIC will be due at the grant and exercise of the options, as long as the options are exercised within 10 years of grant. CGT will be due on sale of shares at a lower rate of 10% regardless of tax rate bracket, as long as the sales is at least 24 months from grant of options, if not, CGT will be either at 10% or 20% depending on your income level.