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Financial Participation

The standard British participation schemes – Save-as-you-Earn (SAYE), Company Share Option Plans (CSOP), Share Incentive Plans (SIP) and Enterprise Management Incentives (EMI) – are all state-supported and given preferential tax treatment. In 2013 there were various proposals and already implemented reforms to simplify and reorganise the four participation schemes, which were also supported by the government.

Save-as-you-Earn (SAYE)1

The first participation programme to be introduced was “Sharesave” as part of the “Save-as-you-Earn (SAYE)” programme during the Thatcher era. Employees are offered share options on special conditions and for a fixed duration by their employers. The SAYE regulations stipulate that companies must give all employees the right to participate. The price at which the option can be exercised is fixed when the SAYE contract is first signed. It corresponds either to the current market price or may be discounted by up to 20%. The duration is fixed at either three or five years and cannot be changed. Participating employees pay a fixed monthly contribution into a SAYE savings plan during this period. At the end of the period the saved amount can be used to buy shares at a fixed option price, though the employee has the additional option of receiving the amount in cash inclusive of accrued tax-free bonus payments and interest.

Before 2013 the special conditions granted could be exercised after a seven year period as well. The seven year duration of a SAYE contract was abolished by the latest reforms, however SAYE schemes can now last three or five years.2

An employee receives a bonus on fulfilling his SAYE contract. Its size is dependent on contract duration:

3 year contracts 1.4 x monthly contribution

5 year contracts 4.4 x monthly contribution

The money required to exercise a share option is saved within a savings contract concluded with a bank or building society. The fixed monthly contributions range from £5 to £250.

The special advantage of SAYE schemes for employees is that any capital gain between option granting and exercise is tax-free. Furthermore, earnings from shares can be paid into another state-supported savings programme (ISA)3 at a later date.

Every employee in Great Britain with more than five years service with an employer is basically eligible to participate in a SAYE scheme. It is at employers’ discretion to include employees with less service time. It is not permitted to exclude individuals or certain groups of employees. An employer is however allowed to offer different conditions to individual employees, such as making the number of share options dependent on seniority or wage scale.

Employees leaving a company due to occupational disability, redundancy or retirement can exercise their share options within six months of their last day of work at the company. Other conditions for exercising options on leaving a company are subject to individual agreements. If an employee does not exercise his option in such circumstances, the amount saved will be paid in cash at the end of the contracted period, inclusive of interest and any bonus payments.

The savings bonus and any capital gains on share options are tax-free. If all savings are invested exclusively in shares and the shares are sold later at a higher price, capital gains tax is liable on any net profits. However no capital gains tax is liable on net gains below £8,500. As the shares held in SAYE accounts are normal common stock of a company, they have the same voting and dividend rights as all other shares once the employee has exercised his option and purchased the shares.

Company Share Option Plan (CSOP)4

This scheme is aimed at supporting share options for particular individuals (mainly executives) at a fixed price and a set option date. Unlike the SAYE programme there are no preferential conditions: the share price is set at the market price in effect when the option was granted. The “Company Share Option Plan” has been available since 1984 and replaced the "Executive Share Option Scheme” (ESOS) in 1996 which had given individual share option packets up to a value of £110,000 preferential tax treatment and also allowed for discounts. The CSOP regulations provide employees with similar tax relief to that given in SAYE schemes: there is no income tax liability on profits resulting from exercising an option, as long as the option has been held for a minimum of three years and a maximum of ten years and that three years have passed since a previous option was exercised. If options are exercised before the end of the three year period, any gains are subject to income tax, unless the employee leaves the company due to occupational disability, redundancy or retirement and exercises his options within six months of leaving. Any capital gains made when exercising an option are subject to capital gains tax.

Unlike under SAYE, an employer can decide who participates in a CSOP, though there are general stipulations that any participant (employee or full-time director) must work at least 25 hours per week, and that employees or directors (board members) already owning more than 25% of shares (or owning share options which could take their share over 25%) are excluded. The same is true for share options in affiliated companies controlled by five or less shareholders, or where the directors are also shareholders.

A further difference to the SAYE programme is that participating employees and directors may not be granted discounted share options. CSOP shares belong to a company’s common stock and have the same voting and dividend rights as all other shares, once the option has been exercised. The shares must be listed on the stock exchange or, if not listed, not be controlled by another company.

The value of CSOP options must not exceed £30,000 (share option x market price on granting) per employee.

Companies offer such schemes to recruit and retain top executives and professionals and to increase their involvement in the company’s well-being.

Share Incentive Plan (SIP)5

This support programme, originally introduced in 2000 under the name “All-Employee-Share Ownership Plan” and renamed “Share Incentive Plan” in 2001, is associated with the British government’s desire to achieve substantial and longer term employee financial participation. It is also seen as a way of increasing company productivity. SIP is not just an employee financial participation programme offering tax and social security contribution relief, but also the first state-supported programme in Great Britain enabling employers to issue shares to selected or all employees based on pre-set performance goals. In 2013 the conditions that an SIP scheme had to meet were lowered. The programme mainly targets small and medium-sized enterprises that are not able to offer their own share options schemes. Under SIP there are four possible employee share schemes:

Free Shares

Companies can issue free shares up to an annual value of £3,000 per employee. The normal retention period is three to five years. Free shares must be available to all members of staff. The number of free shares granted can however be linked to wage scale, seniority or individual, group or company performance goals. No tax or social security contributions are due if the shares are sold after five years.

Partnership Shares

Under this scheme, employees are offered company shares. Employees may invest 10% of taxable income (to a maximum of £1,500) in such shares. There is no set retention period, but there is a tax incentive to hold the shares for a longer period, as no tax or social security contributions are due if the shares are held for more than five years.

Matching Shares

Employers may give their staff free “matching” shares up to an annual value of £3,000 for every partnership share in the company that an employee purchases. The maximum ratio is 2 matching shares to 1 partnership share. Matching shares must be retained for at least three years, and companies may increase this period to five years. Tax and social security treatment is the same as in the other schemes.

Dividend Shares

These shares are acquired through the re-investment of dividends received in respect of shares held in the Share Incentive Plan, subject to a maximum value of £1,500 per annum and a three year retention period, after which the shares are no longer subject to tax or social security contributions. The upper limit of 1,500 pounds was abolished in 2013.6 A new upper limit was not introduced. The literature on SIP schemes does not always include dividend shares.

One advantage for companies offering SIP schemes is that they can reduce their taxable income and thereby their corporation tax burden, as SIP costs can be deducted from earnings.

Enterprise Management Incentives (EMIs)7

EMIs are tax-efficient share option schemes for selected employees (normally executives). This programme is aimed specifically at smaller companies more exposed to risk and is seen as a management incentive system, increasing motivation and commitment to their employing companies.

There is state support for share option packets with a market value of up to £100,000. The total value of all options within a company must not exceed £3 million and total company assets must not exceed £30 million at the time the options are granted. The company must also be classed as having a higher trading risk and as being independent, i.e. it must not be controlled by another company nor may another company own more than 50% of the company’s share capital. Certain types of company are excluded from the EMI programme, for example hotels, nursing homes or garden centres.

Participating employees must work for at least 25 hours per week or, if less, 75% of their regular working time, as an employee of the company offering EMIs and must have no material interest in the company, i.e. hold no more than 30% of a company’s share capital.

The granting and exercise of the share options are free of tax and social security contributions. There is preferential treatment of any capital gains. Companies also benefit, as all EMI costs are deductible from profit, thereby reducing corporation tax. No employer-paid social security contributions are due on EMIs.

Wilke, Maack and Partner (2014) Country reports on Financial Participation in Europe. Prepared for www.worker-participation.eu. Reports first published in 2007 and fully updated in 2014.