The mechanics of share schemes

Cover%20How%20To%20300807Share schemes have maturity options and tax implications that need explaining.

For many employees, joining a company share scheme may be their first serious encounter with the stock market and how it works.

While many employers believe that share schemes help boost motivation by giving staff a sense of ownership there are complex rules for different schemes.

So, it makes sense for employers to provide financial education to ensure that staff understand how the scheme operates, in particular the options open to them when it matures and tax rules.

A sharesave scheme, for example, gives employees the right to buy shares at a future date at a price set on joining the scheme. The shares are purchased from the proceeds of savings made over a three or five period under a special save-as-you-earn contract. When the scheme matures, staff can choose to use the saved money and the interest gained to buy shares in the business or take the the cash.

Without understanding how the scheme works, staff can make the wrong financial decision. One employee benefits consultant recalls a scheme where the shares had done well, but instead of staff exercising their options and selling the shares to realise the gains, many of the employees had simply taken the cash.

Staff may also need some financial education on capital gains tax (CGT) and how to mitigate it as they could be liable if after excercise of the option the shares do well.

Share incentive plans
Under a share incentive plan (Sip) employees can buy shares directly from their employer, be given free shares or receive matching shares for any shares bought. If employees do not want to pay tax or national insurance on the shares they must keep them in the plan for a period of at least five years depending on the scheme rules. Staff who sell their shares when they come out of the plan will not be liable for CGT. Financial education could be used to explain that the proceeds could be transferred into a self-invested personal pension plan where the money enjoys a second set of tax relief. However, if staff hold onto the shares they will be liable for CGT on any additional increase in value.

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