What to consider when deciding which share plan to offer staff

There are many factors to consider when deciding which share plan to offer, says Katrina McKeever

All-employee share schemes enable staff to share in the success of their employer, benefiting from any rise in the share price. According to figures from HM Revenue and Customs (HMRC), about five million UK workers are currently enrolled in such schemes.

Sharesave schemes, also known as save-as-you-earn plans, are the longest-running type of HMRC-approved share plan. Employees can save between £5 and £250 a month from their net salary over three, five or seven years, and if they remain in the scheme until it matures, they have the option to buy company shares at a price agreed at the start of the scheme.

No income tax is payable on the grant or exercise of options and the agreed share price can be discounted by up to 20%. Staff also have the option to take their cash savings with a tax-free bonus on top. The bonus is calculated on set rates, currently 1.5% for three-year schemes, 4.8% for five-year plans and 9.3% for seven-year versions.

Share incentive plans (Sips) are a higher-risk option that allow employees to buy shares in the company directly when they join a scheme. Employers can structure a Sip in several ways. Firstly, they can enable staff to buy shares (known as partnership shares) directly from their pre-tax weekly or monthly salary, up to a limit of £1,500 a year or 10% of salary, whichever is lower, saving employees income tax and national insurance (NI) and employers NI on the amount paid. Alternatively, staff can invest a lump sum of £1,500. Secondly, employers can give employees up to two free shares for each of the partnership shares they buy, known as matching shares. Thirdly, employers can award staff up to £3,000 worth of free shares a year, free of income tax or NI contributions. Employers can also allow an employee to use up to £1,500 of dividends each year from their Sip shares to buy and hold further shares in the Sip.

When setting up a Sip, companies can offer shares in any combination of these methods. If they opt to make all the options available, an employee could receive up to a maximum of £9,000 worth of shares a year.

If staff hold shares in a Sip for five years, they are free from income tax and NICs, and also from capital gains tax if they are sold as soon as they come out of the plan. Partnership shares may be traded at any time, but will not attract the tax relief unless they are held for five years. Such plans also attract corporation tax relief for employers on the cost of: setting up and administering the plan; the market value of free and matching shares at the time they are acquired by the trustees; and the costs incurred in providing shares for employees to buy, if such costs exceed employees’ contributions. Julie Richardson, head of employee share ownership at Ifs Proshare, says: “This is possibly one of the most tax-advantaged schemes we have in the UK.”

Although some employers will offer staff both sharesave and a Sip, in some cases one type of plan may be more appropriate. For example, Sips can be particularly useful in certain business situations, such as a merger or takeover, because giving all employees the chance to buy shares in the new company will give them something in common.

Marcus Peaker, chief executive of Halliwell Consulting, says Sips can also help to engage employees with the business at times of change. “If [employers] have key people they want to retain, there is an advantage in giving them a stake in the business. The psychological impact is great because staff are immediate shareholders.”

Sharesave schemes, meanwhile, are more appropriate around the time of a company’s float onto the stock market, which Peaker says is one of the best times to grant options to staff. “If you offer the option of the float price or a discounted float price, under normal economic circumstances that is a good time to offer sharesave.”

Both types of scheme can also be used to make staff feel they are a part of the wider business. Asda, for example, offers employees an annual sharesave scheme with an option to buy shares in parent company Wal-Mart, which is listed on the US stock exchange, discounted by up to 20% on a price set in sterling. Laura Wilcock, shares manager, reward and recognition, says one-third of Asda’s 150,000 eligible staff are members of a scheme. Although most members tend to sell their shares when a scheme matures, about 50,000 staff currently own Wal-Mart shares. “Take-up tends to be quite good across the board,” says Wilcock. “[Staff] see it as a good way of saving and there is a bonus at the end if the share price goes up.”

Share schemes can also help with retention. With sharesave, employees must remain in the plan for three or five years, depending on what period they have signed up to, to gain the full tax advantages. With Sips, employers that offer free or matching shares can build a forfeiture clause into the contract, stating staff will lose part of their employer-paid allocation if they leave before a specified time.

The current economic climate may affect employers’ decisions on which type of scheme to offer. But many in the industry agree that, overall, there is little risk with either type of scheme. Under sharesave, for example, even if there are no gains on the share price, staff can still take their savings plus the tax-free bonus. The Financial Services Compensation Scheme confirmed in October that savings in sharesave schemes are protected in the same way as bank deposits.

Justin Cooper, executive director at Capita Registrars, says: “In the eventuality that the option price at maturity is below that of the prevailing market price, the individual gets their savings back plus the relevant bonus.”

However, staff who are in a Sip are shareholders from the outset and are exposed to falling share prices. But Richardson advises employers to stress that these are long-term plans. “The share price is going to have to fall a long way before staff lose out,” she says.

Cooper adds: “There is going to be a lot of nervousness about becoming a shareholder for the first time, but those who already are should see this as a good buying opportunity. Significant drops in the market mean shares are a good buy at the moment.”

At a glance: Sharesave

  • Employees can save between £5 and £250 a month from their net salary for a period of three, five or seven years.
  • Staff are given the option to buy shares in the company at a future date at a price set at the time of joining the scheme.
  • At the end of the period staff have elected to save for, the company will offer them the choice of using the saved money and the interest gained to buy shares in the business or take the savings.
  • Both options include a tax-free bonus for completing the selected period for saving.

Share incentive plans (Sips)

  • Employees buy shares directly from their employer (known as partnership shares), which the employer can then match (matching shares).
  • Staff†can buy up to £1,500 worth of shares from gross salary, or 10% of gross salary, depending on which is less, and employers can award up to £3,000 worth of free shares each year.
  • Employers can give up to two matching shares for every one bought by the employee.
  • If shares are held in the Sip for five years, no income tax or national insurance contributions are payable.

Case study: Tesco perks are all-inclusive

Tesco strives to offer benefits that appeal to all its 275,000 staff, many of whom are on low salaries.

All staff are entitled to the same core benefits, including a defined benefit pension plan, sharesave scheme, staff discount card, and a range of voluntary benefits. Louise Pocock, Tesco’s UK benefits manager, says: “Our lifestyle benefit options can be tailored to suit each employee’s circumstances. Tesco offers a defined benefit pension scheme to all staff, which provides long-term benefits to each member of staff regardless of their wages and is arranged to support every employee once they have stopped work.” The retailer uses a wide range of communication methods to ensure all parts of the business receive information on perks. For example, in November it issued staff with an annual benefits report to highlight their individual benefits and pension contributions.

To reach staff who do not have computer access at work, Tesco issues printed leaflets, and key information is sent to home addresses.