Have you been offered company shares as a benefit in work? If you’re feeling out of your depth, John Lowe – the Money Doctor – is here to help.
Employer-employee relationships can be fraught. If your boss asks you if you believe in life after death, beware. It could be a trap. Your boss’s next comment might be, ‘Well, I think I now have proof … after you left here early to go to your uncle’s funeral, he came here looking for you …’.
Not so fraught are the employee benefits available, especially when employed by one of the bigger companies. At the top of those benefits – apart from bonuses, dividends and promotions – are potential share options.
There are a number of ways in which an employer may recompense their employees by affording them the opportunity to acquire shares in the company, in as tax-efficient a way as possible. In many cases, these mechanisms have replaced the traditional cash bonus system.
These are the three most popular schemes:
Approved profit-share scheme
The Finance Act, 1982 introduced a scheme allowing companies that operate an approved profit-sharing scheme to allocate shares to its employees. These employees are then exempt from the income tax charge, subject to certain conditions.
Under the approved scheme, an employee may be allocated company shares up to a maximum annual limit of €12,700. Dividends received by the employees in respect of the allocated shares are assessable to income tax in the normal way.
Since 1 January 2011, the participating employee is liable to pay the universal social charge (USC) and employee pay-related social insurance (PRSI) on the value of any shares appropriated under an approved profit-sharing scheme. The chargeable event is at the date of appropriation (the date you receive the shares).
A share option is a right granted by a company to its employees or directors to acquire shares in the company or in another company at a pre-determined price, but the shares are not given outright.
In some cases, the employee will have to pay something for the option itself. When a person exercises a share option and acquires company shares for less than the market value, they are liable to income tax on the difference between the market value of the company shares and the price paid (ie the option price).
For share options exercised on or after 30 June 2003, an amount known as relevant tax on a share option (RTSO), in respect of this income tax liability, must be paid no later than 30 days after the date on which the share option is exercised. Since July 2012, USC and PRSI due on any gains released must also be paid with RTSO.
Save as you earn
The purposes of a save-as-you-earn (SAYE) scheme are as follows:
- To assist employees to acquire shares in a company at a discount, without having to borrow or pay any income tax on the discount.
- To exempt the recipient employee from income tax on the grant and exercise of the options.
- To allow companies a tax deduction for the costs of running the scheme.
The SAYE scheme is generally linked to a formal savings contract between employee participants and a third-party financial institution. At the end of the savings period (typically three or five years), employees have sufficient capital to fund the exercise of the options and therefore acquire the underlying share.
The minimum savings requirement is €12 per month. The maximum individual savings contribution is €500 per month. These savings are deducted from net income each month, ie after tax, USC and PRSI. Any interest or bonus payable through the savings contract at maturity will be exempt from tax and will not be subject to deposit interest retention tax (DIRT).
The advantages of an SAYE scheme are:
- Shares can be acquired by employees at a discount of up to 25pc of the market value of the share at the beginning of the plan – income tax, USC and employee PRSI would normally apply to the value of the discount.
- Tax-free interest is payable on savings – income tax at 40pc would normally arise.
- There is no obligation on employees to exercise options and acquire shares. The total savings can be withdrawn tax free at the end of the savings period.
- No employer PRSI is payable, which is normally 10.75pc.
Buying or being given a stake in the company you work for has many advantages and many benefits. Loyalty and pride are certainly two characteristics that employees should have in buckets before the mention of options. Such incentive schemes should enhance and embellish that loyalty and pride.
By John Lowe
John Lowe is the managing director of Providence Finance Services Ltd, trading as the Money Doctor. He is also the author of The Money Doctor 2017: 50 Top Tax Tips.