Key Takeaways
- Employees can receive up to £3,600 annually in tax-free bonuses through SIP’s if paid equally to all qualifying staff
- Yes, you can give employees shares without paying tax through government-approved schemes like SAYE, SIP, and EMI
- Employee Ownership Trusts (EOTs) allow business owners to transfer controlling interest to employees with 0% capital gains tax
- Tax-advantaged schemes require HMRC registration and compliance with specific conditions and deadlines
- Non tax-advantaged schemes still require income tax and National Insurance payments on share value
Many business owners wonder whether they can reward employees with company shares without triggering hefty tax bills. The short answer is yes – but only through specific government-approved schemes that come with strict compliance requirements and registration deadlines.
Understanding how to give employees shares in your company without paying tax requires navigating HMRC’s Employment Related Securities (ERS) schemes. These programs can provide substantial tax advantages for both employers and employees, but getting the details wrong can result in significant penalties and lost benefits.
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Yes, But Only Through Approved Tax-Advantaged Schemes
The ability to distribute company shares without immediate tax consequences depends entirely on using HMRC-approved tax-advantaged schemes. Outside these specific programs, any transfer of shares to employees creates taxable events subject to income tax and National Insurance contributions based on the shares’ market value.
Tax-advantaged schemes offer exemptions from some or all taxes that would normally apply when employees acquire company securities. These benefits extend to both the employer and employee, provided all scheme conditions are met and proper registration with HMRC is completed within required deadlines.
Non tax-advantaged schemes, while still legitimate ways to reward employees, require Self Assessment reporting and result in tax liabilities for recipients. The difference in tax treatment can be substantial – making the choice of scheme critical for companies looking to maximize the benefit of employee share ownership.
Government-Approved Tax-Advantaged Share Schemes
The UK government operates several Employment Related Securities schemes designed to encourage employee ownership while providing tax relief. Each scheme serves different purposes and offers varying levels of tax advantages, making it essential to understand which option best fits your company’s goals and employee reward strategy.
These schemes exempt employers and employees from paying certain taxes that would otherwise apply to share transfers. However, maintaining these tax benefits requires ongoing compliance with specific conditions, annual reporting requirements, and adherence to contribution limits set by HMRC.
Save As You Earn (SAYE)
The Save As You Earn scheme allows employees to save between £5 and £500 monthly over either 3 or 5 years to purchase company shares at a fixed discounted price. This government-backed savings scheme provides employees with the opportunity to buy shares at predetermined rates, typically offering discounts of up to 20% below market value.
Employees pay no income tax or National Insurance on the discount they receive when exercising their SAYE options. The scheme is available to employees at all levels within the company, making it an inclusive way to encourage widespread employee ownership and engagement.
Capital gains tax may apply when employees eventually sell their SAYE shares, but only on gains above the annual CGT allowance. The predictable savings structure and tax advantages make SAYE particularly attractive for employees who want to gradually build an ownership stake in their employer.
Share Incentive Plan (SIP)
Share Incentive Plans represent one of the most comprehensive tax-advantaged schemes available to UK companies. Through SIP, companies can give and sell shares to employees with significant tax benefits, provided employees hold the shares for the required period.
Holding SIP shares for 5 years exempts employees from income tax, National Insurance, and capital gains tax on their value. This complete tax exemption makes SIP shares particularly valuable for long-term employee retention and engagement strategies.
SIP encompasses four main types of shares:
- Free Shares: Given to employees at no cost, up to £3,600 annually
- Matching Shares: Provided by the company when employees buy Partnership Shares
- Partnership Shares: Purchased by employees from their gross salary, up to £1,800 annually
- Dividend Shares: Purchased using dividends from existing SIP shares
Early removal of shares from the SIP may trigger capital gains tax obligations when the shares are eventually sold, making the 5-year holding period crucial for maximizing tax benefits.
Enterprise Management Incentives (EMI)
Enterprise Management Incentives are designed specifically for smaller companies to attract and retain key employees through share option grants. EMI options granted before 6 April 2024 must be reported to HMRC within 92 days, while options granted after this date require notification by 6 July following the tax year end.
The scheme offers substantial tax advantages for qualifying companies and employees, including potential capital gains tax relief when options are exercised. However, strict reporting deadlines are essential to maintain these tax advantages – missing deadlines can result in the complete loss of EMI benefits.
EMI schemes are particularly valuable for startups and growing companies that want to offer equity compensation to key staff members without immediate tax consequences. The scheme’s focus on smaller companies makes it an ideal tool for businesses looking to compete for talent against larger organizations.
Employee Ownership Trusts (EOTs) – Zero Capital Gains Tax
Employee Ownership Trusts enable business owners to transfer a controlling interest to employee ownership while completely avoiding capital gains tax. When conditions are met, business owners can sell shares to an EOT at full market value with a 0% CGT rate, making this one of the most tax-efficient exit strategies available.
The sale is generally free from income tax and inheritance tax, subject to HMRC clearance. Only a controlling interest needs to be transferred – typically over 50% of the company – meaning not all shareholders must participate in the EOT transaction.
Benefits for Employees
Employees gain an ownership interest in their company without using personal funds, as the EOT purchases shares on their behalf. This structure creates immediate stakeholder benefits while eliminating the financial barrier that typically prevents employee share ownership.
Tax-free bonuses up to £3,600 annually can be paid to employees if distributed equally among all qualifying staff. These bonuses are cash payments rather than dividends and can be awarded regardless of company profit levels, providing flexible reward options for employee-owned businesses.
The increased employee engagement that typically results from ownership stakes can drive improved business performance, benefiting all stakeholders through enhanced productivity and commitment to company success.
Updated EOT Rules from Autumn Budget 2024
Significant changes to EOT rules took effect on 30 October 2024, impacting the tax treatment of gains and transfer requirements for controlling interest. These updated rules affect how businesses structure EOT transactions and maintain compliance with HMRC requirements.
The new regulations introduce additional conditions that must be met to retain tax benefits, with breach of EOT conditions within four years resulting in withdrawal of relief and capital gains tax assessment. Business owners considering EOT structures must carefully evaluate these updated requirements with professional advice.
Employee Shareholder Shares
Employee shareholder arrangements require individuals to own shares worth at least £2,000 when acquired to qualify for tax benefits. For shares received before 1 December 2016, employees pay no income tax or National Insurance on the first £2,000 of share value.
No tax relief applies if the employee or a connected person holds 25% or more of the company’s voting rights, limiting this option to non-controlling shareholdings. Capital gains tax applies to lifetime gains over £100,000 from shares sold after 17 March 2016.
This scheme provides limited tax advantages compared to other options and has been largely superseded by more comprehensive alternatives like SIP and EMI for most companies seeking to reward employees with shares.
Non Tax-Advantaged Schemes – When Tax Cannot Be Avoided
Share schemes operating outside government-approved programs require income tax and National Insurance payments on the value of shares transferred to employees. These arrangements must be reported through the Self Assessment system, creating additional administrative burden for both employers and employees.
Company Share Option Plans (CSOPs) and Restricted Stock Units (RSUs) may fall into this category when they don’t meet the specific requirements for tax-advantaged status. While still legitimate methods for employee rewards, these schemes result in immediate tax liabilities based on market value of transferred securities.
Registration with HMRC is required only when a reportable event occurs, such as employees acquiring or disposing of securities under the scheme. However, the lack of tax advantages often makes these arrangements less attractive than government-approved alternatives.
Registration and Compliance Requirements
All ERS schemes must be registered with HMRC to maintain tax benefits, making compliance management essential for preserving the advantages these programs offer. Missing registration deadlines risks losing tax benefits for both employer and employees, potentially creating significant unexpected tax liabilities.
Registration Deadlines
Tax-advantaged schemes must be registered by 6 July following the tax year they were established. Non tax-advantaged schemes require registration by 6 July following the tax year of the first reportable event, such as an employee acquiring shares under the scheme.
Companies must first register as an employer and obtain a PAYE reference number, which can take up to 30 working days. Once employer registration is complete, the ERS scheme reference number is issued online within 7 days of successful registration.
Annual Reporting Requirements
Submit an ERS return or nil return by 6 July following each tax year end to avoid penalties. A nil return is required annually even if no shares were transferred under the registered scheme during the reporting period.
Save a copy of your ERS return before submission, as HMRC’s online service does not retain submitted returns for later retrieval. Agents can be authorised to submit returns, but only for schemes that have been properly registered with HMRC.
Failure to submit required returns results in automatic penalties, starting at £100 and escalating based on the length of delay. These penalties apply regardless of whether any actual share transactions occurred during the reporting period.
Tax Implications for Employees
Dividend income from company shares may be subject to tax above the annual dividend allowance, creating ongoing tax obligations for employees who receive share-based rewards. Understanding these implications helps employees make informed decisions about share scheme participation and timing.
ISA transfers completed within 90 days of share exercise can protect employees from UK tax on profits and dividends. The current ISA allowance of £20,000 per tax year (running from 6 April to 5 April) provides substantial protection for share-based gains.
Professional advice is recommended for complex share schemes and tax calculations, particularly when multiple schemes operate simultaneously or when employees hold shares in different capacity. The interaction between various tax rules can create unexpected obligations without proper planning.
FAQ
Do I need to register every employee share scheme with HMRC?
Yes, all Employment Related Securities schemes must be registered with HMRC, whether tax-advantaged or not. Tax-advantaged schemes must be registered by 6 July following the tax year they were set up, while non tax-advantaged schemes are registered when the first reportable event occurs.
What happens if I give shares to employees without using an approved scheme?
Shares given outside government-approved schemes are subject to income tax and National Insurance based on their market value. Both you and your employees will need to report this through Self Assessment, and it may result in significant tax liabilities.
Can I use an Employee Ownership Trust if I only want to sell part of my company?
Yes, EOTs only require the transfer of a controlling interest (typically over 50%), not 100% of the company. Other shareholders can retain their shares and are not required to sell to the EOT.
How long do employees need to hold SIP shares to avoid all taxes?
Employees must hold SIP shares for 5 years to be exempt from income tax, National Insurance, and capital gains tax on their value. Removing shares from the SIP before this period may trigger tax obligations when the shares are sold.
What is the maximum amount employees can receive tax-free through EOT bonuses?
Employees can receive up to £3,600 annually in tax-free cash bonuses through an EOT, provided the bonuses are paid equally to all qualifying employees. Directors can be excluded from these bonus payments if desired.
