04: The main HMRC approved schemes
The tax pitfalls of unapproved scheme can largely be avoided by setting up an approved scheme. The main approved schemes are as follows:The share incentive plan
The share incentive plan, which operates through a trust, allows employers to provide employees with a limited amount of free shares without a tax liability. It is therefore not a share option plan.
- The company can give employees shares worth up to £3,000 a year. To some extent the value of shares distributed in this way can be related to each employee’s performance.
- Employees can also buy shares out of their gross earnings before income tax and national insurance – so, in effect, they benefit from tax relief on the share purchase. The maximum they can buy in this way is up to 10% of their salary with a cap of £1,500.
- The employer can give employees up to two shares for every share the employee buys, ie up to a further £3,000 a year or 10% of salary.
- Employees can reinvest up to £1,500 of dividends on shares under the plan without paying higher rate tax on them.
Tax advantages
There is no tax charge when the shares are ‘appropriated’ to the employee in the trust. Shares are free of income tax and NICs if they are not withdrawn for at least five years and certain shares may be withdrawn earlier. While the shares are held within the plan, any growth is tax free; after they are withdrawn, they may be subject to capital gains tax.
