Employee share incentive plans up for review

The government plans to overhaul schemes offering people shares in their employer to simplify the application process and review cost of tax reliefs.

Sara White, Editor, Accountancy Daily

In a call for evidence, the Treasury wants to hear views on Save As You Earn (SAYE) and the Share Incentive Plan (SIP), as it seeks to improve the schemes and expand their use by making it easier for businesses to set them up and offer them to staff.

The Treasury wants to assess whether the schemes’ rules are simple and clear as well as whether they offer enough flexibility to meet individual companies’ needs. It is also keen to find out if the schemes work for lower earners, particularly as there has been a decline in usage and popularity since 2016.

In June 2022, there were a total of 1,030 employee-owned businesses in the UK. The range of schemes cost over £300m a year in tax relief costs.

This comes as a HMRC evaluation report by Econometrics showed that more than half (55%) of surveyed claimant companies were unaware of having registered for SAYE or SIP in the last 10 years.

The research found that half of businesses used the schemes to ‘create a feeling of ownership of the company’, with a third (31%) saying they helped them retain and recruit staff. However, a third (31%) of businesses said the schemes were too complicated to set up, describing them as ‘complicated, time-consuming and costly’.

The main reason for not offering schemes related to concerns about corporate governance, financing and structure, cited by 38% of respondents, while in many instances management did not want employees to have a ‘controlling interest’ in the company, cited by 27% of non-claimant respondents.

The complexity of the administration process was a concern for 25% of companies while 22% said other compensation and benefits packages were better for recruitment and retention.

Interviewed claimant companies also noted that increasing the limits would make the scheme more applicable and relevant for the most senior members of staff. This was due to the fact that remuneration for senior staff often needs to be higher and can exceed the schemes’ limits.

The two schemes up for review are:

1. Save As You Earn (SAYE): this allows employees to buy discounted shares in their company if they save money up to £500 each month for three to five years. The money saved and interest earned is tax free. Capital gains tax (CGT) may be payable if shares acquired through a SAYE scheme are later sold or disposed.

The number of companies and employees using SAYE has declined since 2015-16 and fell by over 7% in the last eight years.

2. Share Incentive Plan (SIP): this allows companies to help their employees to purchase shares directly in their company or offer them as awards, tax free. They can give employees up to £3,600 of free shares each tax year and individuals can purchase shares out of their salaries up to £1,800 in value or 10% of their income, whichever is lower.

Employees do not pay income tax or National Insurance contributions on the value of the free or matching shares given to them provided they keep them in the plan for at least five years.

HMRC evaluation published shows 50% of companies which have set up a share scheme have done so to create a feeling of ownership among their staff, with other common reasons being to help retain staff and skilled employees, attract skilled employees and improve staff morale.

The call for evidence comes after venture capital firm Index Ventures praised government reforms to a separate scheme, the Company Share Option Plan, placing the UK as joint top among G7 countries in share option policy.

These reforms saw a doubling of the amount of share options employees can be granted and removed restrictions on which kind of shares could be included. Index said the moves the government took were “helping scale ups attract and retain the talent they need”.

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 stake 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 closing date for comment is 25 August 2023.