How do employee share schemes help staff?

Treasury plans huge shake up of employee share schemes – what are they and do they really benefit staff?

  • The Treasury has launched a consultation on employee share schemes 
  • It has asked businesses for their views on SAYE and SIP schemes 
  • We ask how beneficial they really are for employees 

Schemes designed to hand workers a share of the businesses they work for are set for an overhaul under new government plans.

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

Owning part of a business offers employees the incentive to better contribute to the business, and for many owners they have been a good succession planning tool.

Employee share schemes are set for a huge overhaul by the Treasury – but what benefits do they have for staff?

Employee share schemes approved by HMRC tend to be those that come with tax advantages, both for the company offering shares and employees receiving them.

Schemes differ greatly between those suitable for small and large companies. 

For smaller businesses, the enterprise management incentive (EMI) scheme is the best option because it enjoys tax advantages and business owners can choose who is eligible to join the scheme and when.

Larger firms might opt for a Share Incentive Plan (SIP) or Save As You Earn (SAYE), which are both being looked at by the Treasury in its overhaul of share employee schemes.

SIP allows companies to help their employees to purchase shares directly or gift them up to £3,600 in equity, tax free. 

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

Capital gains tax reliefs are also available on each of the schemes.

The interest and any bonus accrued by the end of the contract is tax-free and participants don’t pay income tax or national insurance on the difference between what they bought the shares for and their market value.

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

Victoria Atkins, financial secretary to the Treasury said: ‘Employee share schemes are an effective way to boost motivation in workforces by giving people an extra say in what they do – and they offer a boost for business.

‘Growing the economy is a priority for this government and one way to make this happen is by making these schemes as easy as possible to set up.’

The Treasury says it is particularly interested in understanding whether SAYE and SIP are attractive to lower income earners. 

How do employees benefit from share schemes?

The tax benefits from SAYE and SIP are one of the biggest draws of opting into a company’s share schemes, but they also enable staff to benefit from the success of the business they’re helping to create. 

If you’re new to the idea of investing, joining your company’s share scheme might be a good way for you to understand it.

HMRC figures also released today show that 81 per cent of businesses say the schemes helped boost their business, with almost three quarters saying it helped them to retain and recruit staff.

While the schemes might create a sense of belonging, there are some drawbacks.

When you start to invest through an employee ownership scheme, the hope is that by the time you come to exercise your options, shares will be trading above the amount you’ve paid for them.

However, employee shares in an unlisted company are much harder to value due to the absence of a public for the shares. 

Unlike public companies that have the price per share available via investment platforms, shareholders of private companies have to use a variety of other methods to determine the value of shares.

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

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

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

Inexperienced investors might also only buy their own company’s shares rather than spreading their risk over a more diversified portfolio.