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Making shares a tax-efficient reward for employees

Category: Personal Tax

Making shares a tax-efficient reward for employees

There are various types of employee share scheme which offer tax advantages. Among these, company share ownership plans (CSOP) are sometimes overlooked. What advantages do they have over some of the other schemes?

Why use a share scheme?

Different employers have various reasons for wanting to give shares to employees as incentives. Two popular ones are that it encourages workers’ commitment to the business and that it is more tax efficient than a simple increase in salary. Company share ownership plans (CSOPs) are one of the HMRC-approved schemes.

Why CSOPs?

There are share schemes which allow you to offer a greater value of shares to your employees than CSOPs, e.g. enterprise management schemes, but they carry more restrictions on when they can be used, such as the size of your company and the nature of its trade.

Which employees?

Another advantage of CSOPs over some types of scheme is that you can include all your full or part-time employees, including directors, as long as they don’t own more than 25% of the company’s shares.

Tip. There are no restrictions on which employees are entitled to join your scheme.

How does it work?

There are two key dates for CSOPs; the date of grant, i.e. when you grant an employee the right (option) to acquire shares; and the exercise date, i.e. when an employee takes up (exercises) their entitlement. When the employee exercises their option they are allowed to buy the shares at the value of the date of grant. So as long as the company has grown in value the employee gains. If the value hasn’t increased, the employee doesn’t have to exercise their option.

Tax and NI incentive

The tax advantage of a CSOP is that no income tax or NI is payable at the time you grant an option, nor when the employee exercises it. This is providing, as a general rule, that it’s exercised between the third and tenth anniversaries of the date it was granted. Your company receives a corporation tax deduction equal to the increase in share value between the date of grant and exercise.

Maximum value

To qualify for the tax incentive employees can’t hold CSOP options with a value, at the time of grant, totalling more than £30,000.

Tip. CSOP rules allow you to set conditions to determine if and when employees can exercise options. You can, therefore, set performance targets to help get the most out of your employees. You’ll need to discuss the conditions you want to impose with whoever sets up the scheme for you.

How’s it done?

HMRC provides model documents for employers who want to use a CSOP (see The next step ). However, it’s probably one of those jobs to get your accountant involved in.

While CSOPs allow similar tax advantages to other share schemes, there are no restrictions on the types of business that can use them. Full and part-time employees (including directors) can be included and you can set conditions, such as targets, to encourage your employees’ performance.

Termination Payments – New Rules

Following consultation, the government has published draft new rules on employee termination payments. As an employer, how and when might they affect you?

More tax please! The government has made no secret about needing to tighten its purse strings, but it’s more cagey about the other side of the coin: raising extra tax. It prefers to dress that up as simplifications or removing unfairness from the system. Such is its reasoning for the new rules for tax on lump sum payments to employees.

Current rules. To be fair, the current rules can be confusing, which is why many disputes with HMRC end up in court. So clarification is a good thing for employers. For example, one of the trickiest issues for employers is whether or not to tax a payment to a departing employee where it’s made for the period of notice they aren’t required to work: a payment in lieu of notice (PILON). What’s more, the treatment for NI purposes may differ.

New rules. While HMRC released details of the new legislation in August 2016, it isn’t scheduled to take effect until 6 April 2018, so you must continue to apply the existing rules until then.

What’s changing? When the new rules come in, the main changes you need to be aware of are that:-

– all PILONs will be subject to tax and NI (employers’ and employees’), in the same way as regular salary

– all other post-employment payments you make to an employee, which would have been treated as earnings if the employee had worked their notice period, will be liable to tax and Class 1 NI (employees’ and employers’); and

– payments relating directly to the termination of the employment will be tax and NI free up to £30,000 (as they are now), but any amount paid in excess will be liable to tax and employers’ NI, but you won’t have to deduct employees’ NI.

The new rules apply from 6 April 2018. Payments in lieu of notice and other earnings-related sums will be liable to tax and NI. The £30,000 exemption for sums directly linked to termination of employment will continue.

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