What types of employee share schemes receive favourable tax treatment?

There are four Inland Revenue approved schemes:

• The All-Employee Share Plan
• Approved profit sharing schemes
• Approved Save As You Earn share option schemes
• Approved company share option schemes

The All-Employee Share Plan is a scheme whereby employers offer their employees the opportunity to buy 'partnership shares' in their businesses, from gross pay. The benefit of this scheme is that it reduces the amount of gross pay for calculating income tax and national insurance contributions. It means you get more shares for your money.

There may, however, be a slight disadvantage to a small number of employees, namely those who pay less in national insurance contributions, because it may reduce their entitlement to benefits should they need to make a claim.

In approved profit sharing schemes there is a fund, known as a trust, which is under the control of trustees. The employer makes payments to the trustees to buy shares in the company. The trustees set aside some of these shares for each employee who takes part in the scheme. The Inland Revenue exempts payment of tax on the value of these shares as long as they are not sold within three years. An additional tax advantage is that shares can be directly transferred into a single company Personal Equity Plan (PEP).

Under an Approved Save As You Earn share option scheme employees have the right, called a 'share option', to buy a certain number of shares at a fixed price at a particular time. Employees can only use the money they have built up in a Save As You Earn (SAYE) contract. They can reserve a right to buy shares at a favourable price, (but not less than 80% of market value), within a specified, limited time frame. If employees do not exercise their right to buy they get the proceeds of their SAYE contract on its completion. The tax advantage is that the value of shares received under this scheme is free of tax. An additional tax advantage is that shares can be directly transferred into a single company Personal Equity Plan (PEP).

Under an approved company share option scheme employees have the right, called a 'share option' to buy a fixed number of shares at not less than market value within a specified, limited time frame. If the share value increases during that time and the employee buys at the (then) favourable price, the value of the shares is not taxable. There is a limit on the total value of shares employees can hold under this type of scheme.