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The Actuary The magazine of the Institute & Faculty of Actuaries

Fair shares?

For the employee Charlie, with £1,000 burning a hole in his pocket an AVC payment could be a wise move. Its rival the government’s proposed new all-employee share scheme also looks enticing. Let us look at this new creature and its star-spangled sister, the proposed new enterprise management incentive scheme. Before we do so, a quick look at share schemes available at the moment.

Existing Revenue-approved schemes
At present there are three different types of Revenue-approved schemes:
– savings-related share option schemes;
– profit sharing schemes; and
– company share option plans.
The first two types of scheme must be offered to all employees on similar terms. The company share option plan can benefit either selected employees or all employees.

Savings-related share option schemes
Savings-related share option schemes are ‘bankers’ the employee must win. He saves monthly with a financial institution. After three, five, or seven years he can use the accumulated savings to exercise his share option, or he can instead bank the money and have a holiday in Majorca, or buy a car or put the money on the 2.30pm at Doncaster races. These latter indulgent possibilities worry the government. Despite protestations from the share scheme industry (financial institutions) that share options are frequently exercised under savings-related share option schemes, the government’s general disquiet with these schemes remains.

Profit-sharing scheme
The other existing type of all-employee scheme is the profit-sharing scheme. A company pays contributions to a profit-sharing trust. The trustees use the funds to acquire the company’s shares and then allocate the shares to employees. Once three years elapses, the shares can be withdrawn free of income tax. The allocation must be to all employees on similar terms. These schemes are still popular, albeit their structure is rather rigid.

Company share option plan
As feline readers will recall, this is the fat cat as was. Originally, an individual could be granted options up to a value of £100,000. After criticism from various quarters this was reduced to £30,000 per employee.

The new all-employee scheme
This scheme enables an employee to benefit each year from a share allocation of up to £7,500-worth of shares. This is made up as follows:
– ‘free’ shares of up to £3,000 awarded by the employer;
– partnership shares whereby the employee can divert up to £1,500 of pre-tax salary to acquire further shares; and
– matching shares for every one partnership share the employer can supply a further two shares.
All these shares are to be held in trust. Providing they stay there for five years, they pass to the employee free of tax and national insurance contributions. Between three and five years there is tax on a sliding scale.
So what is new? The new element is flexibility. The employer can choose whether to include all three types of shares (free, partnership, or matching) or use certain other combinations. Although all employees must be included in the scheme, performance criteria can be set for the award of shares. Performance criteria may differ between different employee units.
The government is vigorously promoting the merits of the new all-employee scheme. However, every silver lining has a cloud. What if Widgets Limited goes into liquidation after Charlie has belonged to the scheme for five years and seen £37,500 of his arguably deferred pay, and significant ‘actual’ pay ploughed into the all-employee scheme? The answer, as for all self-investment, is nil return for Charlie. Perhaps he should have paid those AVCs after all!
Will the employee’s allocation of salary to purchase partnership shares reduce his pay limits for pension contribution purposes? Answer, no. Curiously the government’s consultation paper refers only to limits for pension contributions, and not limits on pension benefits. Hopefully, they too will be unaffected.
Charlie is scratching his head. Why should he save with the new all employee scheme rather than company’s existing savings-related scheme? If the company fails, at least his savings are safe with the good old savings-related scheme. Good point. The Government will decide in the next few months whether existing types of Revenue approved scheme may continue.

The new enterprise management incentive scheme (EMI)
This scheme is likely to be of considerable interest to smaller companies gross assets not exceeding £15m. Up to ten key full-time staff can be granted share options over ordinary shares of a value of up to £100,000 per individual.
The shares concerned can be subject to restrictions and/or forfeiture. Careful drafting of the EMI option agreement will be necessary and legal advice essential.
On option exercises within an option period of up to ten years there will normally be no income tax or NICS to pay. CGT applies on sale of the shares, but will be tapered at the special CGT business rate.
All in all, the EMI looks as though it will be a worthy contender in the remuneration stakes perhaps helping to raise the star of share schemes in the remuneration cosmos?
So there we are. New schemes and just a few restrictions. Oh, yes let us not forget Revenue restrictions on approved schemes can be deadly, eg shares in an unlisted subsidiary of an unlisted parent cannot be used for Revenue-approved schemes. There will still be room for non-Revenue-approved share schemes but that is a topic for another article.