Many employers have introduced a move away from cash incentive plans or bonuses to similar awards (which are long-term in nature) and often revolve around granting of shares, or share options, instead of cash bonuses. This piece does not cover the merits of owning company shares themselves, nor does it consider where shares have been given free, or as part of a long-term incentive plan (LTIPs).
A common type of share plan is where shares are bought from monies after they’ve paid tax, and where the purchase of the shares (including increase in value) is tax-free. This type of share save scheme (SAYE) will often allow the shares to be bought without any risk (i.e. a cash alternative is available if an individual declined to take up the share purchase), and therefore, as long as it’s affordable and no other benefit is being given up in return (i.e. an employer contribution to the pension scheme), it usually makes good sense to join this type of share save. These share schemes often come in three or five year duration versions and may have different provisions if you leave the company for either “good” or “bad” reasons. Because of the risk control (cash alternative) of this type of scheme they are generally good value.
It’s also possible to “game” the share save by choosing a short period of time (i.e. three years) and opting out of subsequent years if the share price has fallen, though of course there is no guarantee that the share price rises proportionally over the subsequent period so caution needs be taken by using this strategy. Under some circumstances proceeds will be free of capital gains tax, and the granting of the shares should always be free of income and capital gains tax on the difference between what is paid and what they’re worth.
Other type of schemes often do not have the risk mitigation parameters of the type mentioned above, so there is the potential for shares to fall in value and the individual to experience a loss. Nevertheless the shares may come with a discount, or by the granting of “free” shares so they can still be good value albeit with more risk caveats than the other type. Share Incentive Plans (SIP) are a common type of alternative, as are Company Share Option Plans and Enterprise Management Incentives (EMIs), though the latter is only for smaller companies (value less than £30m). The first two have limits on what can be acquired.
If you are not in one of these schemes the tax treatment is likely to be different: income tax when the shares are granted, and potential capital gains tax when sold. Understanding these liabilities is important, even if they are taxed under PAYE: whilst they can still offer good value you will be paying tax on monies you cannot necessarily realise for a significant time.
These are not the only types of share schemes that employers will offer but should give an indication on how different they can be in terms of tax, risk and accessibility. As detailed in my next piece, the appropriateness of the share scheme, and whether you join it or not, is an independent consideration of whether you keep the shares after any option period or other time-based restriction. But generally speaking owning individual shares is not likely appropriate for most investors, and therefore without making comment as to the prospects and fortunes of your employer, we would generally suggest that you dispose of them at the earliest possible point, notwithstanding any capital gains tax or other considerations.