Employee share plans in the UK (England and Wales): regulatory overview

A Q&A guide to employee share plans law in the UK (England and Wales).

The Q&A gives a high level overview of the key practical issues including, whether share plans are common and can be offered by foreign parent companies, the structure and rules relating to the different types of share option plan, share purchase plan and phantom share plan, taxation, corporate governance guidelines, consultation duties, exchange control regulations, taxation of internationally mobile employees, prospectus requirements, and necessary regulatory consents and filings.

To compare answers across multiple jurisdictions, visit the Employee Share Plans: Country Q&A tool.

This Q&A is part of the global guide to employee share plans law. For a full list of jurisdictional Q&As visit www.practicallaw.com/employeeshareplans-guide.

Contents

Employee participation

1. Is it common for employees to be offered participation in an employee share plan?

Employee share plans are an established part of the remuneration packages offered to UK-listed companies' employees. Employers can offer share plans both generally to all employees (all-employee plans) and/or selectively to senior executives and executive directors. UK-listed companies often take advantage of one or more of the tax-favoured share plans (see Question 3).

Private companies tend to offer share plans less often as there is no market for employees to sell the shares. However, private companies often set up employee share plans in anticipation of an initial public offering or a trade sale. Where a future market for a private company's shares is not anticipated, a private company can establish an internal market for its shares, for example by setting up an employee benefit trust to purchase shares from employees and to then sell on those shares to other employees.

 
2. Can employees be offered a share plan where the shares to be acquired are in a foreign parent company?

An employee can be offered a share plan over shares in a foreign parent company (the foreign company may have to comply with prospectus requirements (see Question 29)).

 

Share option plans

3. What types of share option plan are operated in your jurisdiction?

The following share option plans are available:

  • Tax-favoured save-as-you-earn option plan (SAYE plan).

  • Tax-favoured enterprise management incentives plan (EMI plan).

  • Tax-favoured company share option plan (CSOP).

  • Non-tax favoured share option plan.

SAYE plan

Main characteristics. A SAYE plan allows employers to grant employees share options on a favourable tax basis. Employees contract to save a fixed amount over a fixed savings period, at the end of which the savings will, in certain circumstances, attract a tax-free bonus (see Question 5). A three or five-year savings period is specified at the start, as is the maximum number of shares which can be bought at the relevant option price with the total savings and, where applicable, the bonus payable at the end of the contract. The option price can be at a discount of up to 20% of the shares' market value at the time of grant.

Types of company. To offer an SAYE plan, a company must either:

  • Have its shares listed.

  • Not be under the control of another company, unless that company is listed.

Popularity. SAYE plans are very common in listed companies.

EMI plan

Main characteristics. An EMI plan gives significant tax advantages to smaller trading companies granting share options to selected employees.

Types of company. A company can only offer an EMI plan if it meets the following conditions:

  • It (or its group) has gross assets of no more than GB£30 million.

  • A substantial part of its business trading activities complies with the detailed requirements of paragraphs 13 to 23 of Schedule 5 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA).

  • It has fewer than 250 employees. Part-time employees are counted proportionally.

In addition, where the company is part of a group:

  • The shares over which the options are granted must be shares in the group's ultimate parent company.

  • The group must include at least one company whose business trading activities comply with the ITEPA requirements (see above), and a substantial part of the group's business must meet those requirements.

  • The company's subsidiaries must all be 51% subsidiaries.

Popularity. EMI plans are popular due to their flexibility and significant tax advantages. They are common among qualifying smaller companies.

CSOP

Main characteristics. Under a CSOP, an employer can give employees options to buy a fixed number of shares at a fixed price and within a fixed period. Options are typically granted at a price that is equal to the shares' market value at the date of grant (they cannot be granted at a lower price) and are not usually exercisable for three years from the date of grant.

Types of company. To offer a CSOP, a company must either:

  • Have its shares listed.

  • Not be under the control of another company.

Popularity. CSOPs are popular with listed companies due to their tax efficiency. They are typically used together with a non-tax favoured share option plan if the company grants options in excess of the individual CSOP limit (see below, Non-tax favoured share option plan and Question 4, CSOP).

Non-tax favoured share option plan

Main characteristics. An employer can grant share options to any employees on any terms. Any share option plan that is not an SAYE plan, EMI plan or CSOP is a non-tax favoured share option plan.

Types of company. Any type of company can operate a non-tax favoured share option plan.

Popularity. These plans are used by companies that do not qualify for any of the tax-efficient plans, or that grant options to employees over the maximum limit set by the CSOP (see above, CSOP and Question 4, CSOP).

Grant

4. What rules apply to the grant of employee share options?

SAYE plan

Discretionary/all-employee. SAYE plans must be offered on similar terms to all eligible employees.

Non-employee participation. Non-employee directors and consultants or prospective employees are not eligible by right to participate in a SAYE plan. However, non-employee directors can participate if invited to do so by the company.

Maximum value of shares. The maximum value of shares per employee depends on the:

  • Participant's monthly savings. Currently, the maximum monthly savings limit is (from 6 April 2014) GB£500.

  • Savings contract's length. The maximum length is five years.

  • Applicable bonus. In principle, a tax-free bonus may be payable on the maturity of the SAYE savings contract. However, effective for contracts from 27 December 2014, there is no bonus payable under the three or the five-year savings contract.

  • Exercise price discount from the market value of the shares. The maximum discount is 20%.

The maximum market value of shares over which an SAYE option can be granted in the 2016/2017 tax year (if all these factors are set at their maximum) is GB£37,500 (calculated on the basis that no bonus is payable). No discount is given for any restrictions on the shares.

Market value. The maximum discount is 20%.

EMI plan

Discretionary/all-employee. EMI plans are discretionary and employers can grant options to any employee on any terms. The terms can differ between employees, even for options granted on the same date. However, there are certain restrictions (see below, Maximum value of shares).

Non-employee participation. Only employees can benefit from the tax-favoured treatment of EMI options.

Maximum value of shares. Each employee can only hold unexercised options over a maximum of GB£250,000 worth of shares. A company can only grant EMI options over a maximum of GB£3 million worth of shares.

These values are calculated by reference to the shares' market value at grant. No discount is given for any restrictions on the shares.

In any three-year period, the value of shares that can be subject to options granted to an employee is restricted.

Market value. An EMI option can be granted at, above or below market value. For options granted at below market value, see Question 8, EMI plan.

CSOP

Discretionary/all-employee. CSOPs are discretionary and CSOP options can therefore be granted to any employee on any terms. However, there are certain restrictions (see below, Maximum value of shares).

Non-employee participation. Non-employee directors and consultants or prospective employees are not eligible to participate in a CSOP.

Maximum value of shares. Each employee can only hold unexercised options over a maximum of GB£30,000 worth of shares. This value is calculated by reference to the shares' market value at grant. No discount is given for any restrictions on the shares.

Market value. A CSOP option cannot be granted for less than market value.

Non-tax favoured share option plan

Discretionary/all employee. Non-tax favoured share options can be granted to any employee, over any number of shares and on any terms.

Non-employee participation. In principle, non-tax favoured share options can be granted to non-employee directors and consultants or prospective employees, although in practice this is rare. Participation in a share plan by a non-employee may give rise to certain company law and/or regulatory issues. In addition, institutional investor guidelines for listed companies generally provide that participation in share plans should be limited to employees/executive directors.

Maximum value of shares. In principle, there is no limit to the number of shares over which options can be granted.

Market value. Non-tax favoured share options can be granted at, above or below market value.

 
5. What are the tax and social security implications of the grant of the option?

SAYE plan

Tax or social security charges (known as national insurance contributions (NICs) in the UK, which are usually payable by both the employee and the employer) are not payable on grant.

EMI plan

Tax or NICs are not payable on grant.

CSOP

Tax or NICs are not payable on grant.

Non-tax favoured share option plan

Tax or NICs are not payable on grant.

Vesting

6. Can the company specify that the options are only exercisable if certain performance or time-based vesting conditions are met?

SAYE plan

The exercise of options under an SAYE plan is linked to time-based vesting conditions, but cannot be linked to performance-based conditions (see Question 4, SAYE plan).

EMI plan

The employer can (but is not required to) set performance and/or time-based conditions that must be met before an EMI option can be exercised. Time-based conditions appear to be more common than performance conditions. These conditions must be set out clearly when the option is granted.

CSOP

The employer can (but is not required to) set performance and/or time-based conditions that must be met before a CSOP option can be exercised (performance conditions are particularly common in listed companies). These vesting conditions must be:

  • Objective.

  • Set out clearly when the option is granted.

  • Notified to the option holder as soon as practicable after the grant of the option.

Non-tax favoured share option plan

The employer can (but is not obliged to) set performance and/or time-based conditions that must be met before a non-tax favoured option can be exercised (performance conditions are particularly common in listed companies). In practice, vesting conditions should be set out when the option is granted, although they can be less precise than, for example, a CSOP option's conditions.

 
7. What are the tax and social security implications when the performance or time-based vesting conditions are met?

SAYE plan

Tax or national insurance contributions (NICs) are not payable when the time-based conditions are met.

EMI plan

Tax or NICs are not payable when the vesting conditions are met.

CSOP

Tax or NICs are not payable when the vesting conditions are met.

Non-tax favoured share option plan

Tax or NICs are not payable when the vesting conditions are met.

Exercise

8. What are the tax and social security implications of the exercise of the option?

SAYE plan

No tax is payable if an SAYE option is exercised on or after the third anniversary of the date of its grant. Exercise before the third anniversary is unusual and in principle gives rise to a tax charge. However, certain "good leavers" (including, for example, employees who have left through redundancy or retirement or by reason of their employment, or their employing company, being transferred out of the group) can exercise their options within three years of grant without triggering income tax. Tax relief may also be available on the early exercise of options in the event of certain cash takeovers. For the 2016/2017 tax year, the rates are (subject to the availability (where applicable) of the personal tax-free allowance):

  • 45% for income over GB£150,000.

  • 40% for income over GB£32,000.

  • 20% for income of or below GB£32,000.

National insurance contributions (NICs) are not payable on the exercise of an SAYE option.

Conditions. A number of conditions must be met for the favourable SAYE tax treatment to apply, including:

  • The savings contract must be an HM Revenue & Customs (HMRC)-approved savings contract with a bank or building society.

  • The SAYE plan must be registered with HMRC and the company must "self-certify" to HMRC that the plan complies with the SAYE legislation. Before 6 April 2014, the rules of the SAYE plan were instead approved in advance by HMRC.

Accounting for tax/social security. If income tax is payable on exercise, it is the employee's responsibility. Employers have no withholding or reporting requirements for employees' capital gains tax (CGT) and payment of CGT is the employee's responsibility.

How liability is recovered from employee. Not applicable.

EMI plan

There are no tax or NICs payable on exercising an EMI option if both:

  • The option is granted with an exercise price that is equal to or greater than the shares' market value at the date of grant.

  • The EMI plan qualifying criteria are met (see Question 4, EMI plan), subject to limited exceptions.

If the option is exercised within 90 days of the criteria ceasing to be met (disqualifying event), no tax or NICs are payable. If the option is exercised more than 90 days after the disqualifying event, income tax is charged on the amount (if any) by which the market value of the shares on exercise exceeds their market value immediately before the disqualifying event (the gain made before the disqualifying event is not subject to income tax).

Where the exercise price is lower than the shares' market value on the date of grant, income tax is charged at exercise on the difference between the shares' discounted exercise price and their market value at the date of grant.

Conditions. A number of conditions must be met for options to qualify as EMI options. The option must be granted for commercial reasons to recruit or retain the employee (and not for tax avoidance purposes) and the relevant employee must meet minimum working time requirements to be eligible. In contrast to the other UK tax-favoured share plans, there is no requirement for the company to self-certify to HMRC that the EMI plan complies with the relevant legislation. However, from 6 April 2014, the EMI plan must be registered with HMRC so that the notification of EMI option grants to HMRC can be made online, which is a requirement of the legislation. Before 6 April 2014, there was no requirement that the filing of EMI grants with HMRC be made online. To qualify for the favourable tax treatment, the grant of an EMI option must be notified to HMRC online within 92 days of the grant date.

Where income tax is payable on exercise, the employer must withhold and account for this tax if one or more of the following applies:

  • The shares are listed on a stock exchange.

  • The shares are otherwise saleable or soon to be saleable (for example, there are trading arrangements in place or a private company is being sold).

  • The shares meet other criteria (for example, they are shares in a subsidiary of an unlisted company).

If one or more of the above apply, the employer is liable to account for income tax and NICs under the pay as you earn (PAYE) system. Income tax is charged at the employee's marginal tax rate. The PAYE and NICs must be paid to HMRC within 17 days after the end of the tax month in which the taxable event occurred (that is, by the 22nd of the month), where the payment is made electronically, or within 14 days after the end of the tax month (that is, by the 19th of the month) in any other case. A tax month runs from the sixth day of the month to the fifth day of the following month.

The standard rate for employee NICs is currently 12%. The rate for employee NICs for employees' earnings above GB£827 a week is reduced to 2%.

Employer NICs are currently payable at 13.8% of the employee's gain (uncapped).

How liability is recovered from employee. Employers typically recover the PAYE amount and employee NICs from employees, but it is advisable for them to include specific provisions in the EMI plan enabling them to do so, for example where the employer is authorised to sell sufficient shares on exercise to meet the liabilities. Employers sometimes recover employer NICs from employees, but need a specific provision in the plan rules (or a separate agreement with an employee) to be able to do this.

CSOP

If the employee exercises the CSOP option on or after the third anniversary of the date of the grant, there are no tax charges or NICs. Except for "good leavers" (which includes, for example, employees who have left through redundancy or retirement or by reason of their employment, or their employing company, being transferred out of the group), exercise before the third anniversary usually gives rise to a tax charge and NICs. In addition to "good leavers" who exercise early, tax relief may also be available on the early exercise of options in the event of certain cash takeovers.

Conditions. A number of conditions must be met for the favourable tax treatment for CSOP options to apply, including:

  • The shares must form part of the ordinary share capital of the company.

  • The CSOP plan must be registered with HMRC and the company must "self-certify" to HMRC that the plan complies with the CSOP legislation (before 6 April 2014, instead of registration/self-certification, the rules of the CSOP plan were approved in advance by HMRC).

Tax/social security on sale. CGT is payable in the same way and at the same rates as for an SAYE plan. No NICs are payable on the sale of the shares.

Accounting for tax/social security. The employer is liable to account for income tax if the shares meet the necessary criteria. If the employer is liable, it pays income tax and employee NICs under PAYE, and employer NICs. If it is not liable, employees pay income tax under the self-assessment system, with no employee or employer NICs being payable.

Employers have no withholding or reporting requirements when the shares are sold, and no NICs are payable.

How liability is recovered from employee. This is the same as for EMI plans (see above, EMI plan: How liability is recovered from employee).

Non-tax favoured share option plan

When an option is exercised, income tax arises on the difference between the shares' market value on the date of exercise and their exercise price.

Accounting for tax/social security. The employer is liable to account for income tax if the shares meet the necessary criteria. If the employer is liable, it pays income tax and employee NICs under PAYE, and employer NICs. If it is not liable, employees pay income tax under the self-assessment system, with no employee or employer NICs being payable.

How liability is recovered from employee. This is the same as for EMI plans (see above, EMI plan: How liability is recovered from employee).

Sale

9. What are the tax and social security implications when shares acquired on exercise of the option are sold?

The following notes relating to SAYE plans, EMI plans and CSOP assume that no income tax arises at exercise. However, if an income tax charge is triggered at exercise, the employee receives a "base cost uplift" (that is, a credit for the income tax liability) in calculating the capital gains tax (CGT) liability.

SAYE plan

CGT is payable at either 18% or 28% on the difference between the shares' sale price and the amount paid for the shares on exercise. No national insurance contributions (NICs) are payable on the sale of shares.

For individuals, the rate of CGT is 18% where their total taxable gains and income are less than the upper limit of the income tax basic rate band (GB£32,000 for 2016/17). The rate of 28% applies to gains (or any part of gains) above that limit. In addition, taxpayers can offset losses and the annual exempt amount (GB£11,100 for 2016/17) against gains.

EMI plan

CGT is payable at either 18% or 28% on the difference between the shares' sale price and market value of the shares on the date of the grant. No NICs are payable on the sale of shares.

CSOP

CGT is payable in the same way and at the same rates as for an SAYE plan (see above, SAYE plan).

No NICs are payable on the sale of the shares.

Non-tax favoured share option plan

CGT is payable at either 18% or 28% on the difference between the shares' sale price and their market value on their acquisition date.

No NICs are payable on the sale of the shares.

 

Share acquisition or purchase plans

10. What types of share acquisition or share purchase plan are operated in your jurisdiction?

The following share acquisition or purchase plans are available:

  • Tax-favoured share incentive plan (SIP).

  • Conditional share award plan (for example, long-term incentive plan (LTIP) or deferred bonus plan).

  • Restricted share acquisition plan (also known as a share acquisition arrangement).

SIP

Main characteristics. Under a SIP, an employer can award shares to its employees for free, or employees can purchase shares on a tax-favoured basis. The shares are held in a trust, and a minimum period of three years is imposed before the employee can withdraw any free shares. A company can choose whether to offer:

  • Partnership shares. The employees pay for these from pre-tax salary.

  • Matching shares. The employer awards these free of charge at a maximum ratio of two matching shares for each partnership share acquired.

  • Free shares. These are awarded for free.

  • Dividend shares. These are where dividends are paid on any of the above shares and reinvested in additional shares.

Types of company. A company can offer a SIP if either:

  • Its shares are listed.

  • It is not under the control of another company, unless that other company is listed.

Popularity. SIPs are commonly used, but mainly by listed companies.

Conditional share award plan

Main characteristics. Employees are awarded a conditional right to acquire shares at the end of a specific period (typically three years), without having to buy them. Once the conditions are met at the end of the period, the employees have an absolute right to the shares. It is common for employers to defer part of a cash bonus into shares by awarding a conditional right to acquire shares equal in value to the deferred cash bonus.

Types of company. Any company can operate these plans.

Popularity. These plans are very common among listed companies and, over the last few years, have been preferred by listed companies over non-tax favoured share option plans. This type of plan is known by a number of different names and is often called a performance share plan or LTIP when it includes performance conditions.

Restricted share acquisition plan

Main characteristics. Employees acquire shares (either for free, at a discount to market value or at full market value), but the shares continue to be subject to specific restrictions. Typically, these relate to the price at or to whom the shares can be sold (for example, depending on whether employees leave the company as good or bad leavers).

Types of company. Private companies that wish to keep control over the ownership of their shares typically put in place these plans. Listed companies may not be able to impose the restrictions that typically apply to the shares.

Popularity. These plans or arrangements are commonly used in companies owned by private equity investors as a mechanism for an employee management team to acquire shares in the company.

Acquisition or purchase

11. What rules apply to the initial acquisition or purchase of shares?

SIP

Discretionary/all-employee. SIPs must be offered to all eligible employees on similar terms. However, a company can choose which categories of shares it offers (see Question 10, SIP), and if it offers partnership shares, it can set caps on value bought (see below, Maximum value of shares).

Non-employee participation. Non-employee directors and consultants are not eligible by right to participate in a SIP. However, non-employee directors can participate if invited to do so by the company.

Maximum value of shares. Shares under a SIP come in different categories (see Question 10, SIP). The annual maximum value of shares that individual employees can acquire depends on the type of shares:

  • Partnership shares: GB£1,800 (from 6 April 2014) or 10% of the employee's annual salary, whichever is lower.

  • Matching shares: GB£3,600 (from 6 April 2014) at a maximum ratio of two matching shares for each partnership share.

  • Free shares: GB£3,600 (from 6 April 2014).

  • Dividend shares: there is no statutory limit on dividend re-investment (although the company can set its own limit).

There is no maximum value for the employer.

Payment of shares and price. Partnership shares are the only category of shares that employees must pay for. They must pay their market value on their acquisition date, unless the funds are accumulated for a period of time before the shares are purchased, in which case they pay the shares' price on any of the following:

  • The start of the accumulation period.

  • The acquisition date.

  • The lower of the two share values referred to above.

The method is set in advance by the company.

Partnership shares are bought using deductions from salary or wages, and no income tax or national insurance contributions are paid on these deductions.

Conditional share award plan

Discretionary/non-discretionary. A company can operate a conditional share award plan on whatever basis it wishes.

Non-employee participation. In principle, non-employee directors and consultants can participate. However, including non-employees in a share plan may give rise to certain company law and/or regulatory issues. In addition, institutional investor guidelines for listed companies generally provide that participation in share plans should be limited to employees/executive directors.

Maximum value of shares. There is no limit to the value of shares that can be used or awarded.

Payment of shares and price. Employees typically do not have to pay anything to acquire the shares.

Restricted share acquisition plan

Discretionary/non-discretionary. A company can operate a restricted share plan on whatever basis it wishes.

Non-employee participation. In principle, non-employee directors and consultants can participate. However, including non-employees in a share plan may give rise to certain company law and/or regulatory issues. In addition, institutional investor guidelines for listed companies generally provide that participation in share plans should be limited to employees/executive directors.

Maximum value of shares. There is no limit to the value of shares that an employee can acquire.

Payment of shares and price. Although the company has flexibility as to what, if anything, employees should pay to acquire the shares, tax considerations are highly relevant.

 
12. What are the tax and social security implications of the acquisition or purchase of shares?

SIP

No tax or national insurance contributions (NICs) are payable when the shares are awarded, regardless of the particular type of share. A number of conditions must be met to qualify for the favourable tax treatment under a SIP. The conditions include that the shares must form part of the ordinary share capital of the company. The SIP must be operated in conjunction with a special employee benefit trust that is tax-resident in the UK. The SIP must be registered with HMRC and the company must "self-certify" to HMRC that the plan complies with the SIP legislation (before 6 April 2014 instead of registration/self-certification, the SIP trust deed and rules were approved in advance by HMRC).

Conditional share award plan

No tax or NICs are charged until employees become entitled to the shares, which typically does not happen until conditions placed on the shares have been met.

Restricted share acquisition plan

There is no income tax charge if employees acquire shares for their market value or above. If they acquire them for below their market value, an income tax charge arises immediately (except where the shares are forfeitable within fewer than five years) on the difference between the shares':

  • Market value (but with a discount for the restrictions attaching to the shares) on their acquisition date.

  • Acquisition price.

More income tax and NICs are then usually payable when the restrictions are lifted and the shares vest or are sold, based on the percentage discount that was not taxed at the time of acquisition. The taxation of restricted shares is complicated. The employer and the employee can make a joint election for an alternative tax treatment under which they agree to pay tax and NICs at the outset by reference to the market value of the shares at that time, ignoring restrictions. By doing so, they are protected against any further income tax or NICs under the rules relating to restricted shares.

The employer may have to account for the tax and employee NICs on the employees' behalf, under PAYE, and pay employer NICs.

Vesting

13. Can the company award the shares subject to performance or time-based vesting conditions?

SIP

Free shares can be awarded on the basis of pre-award performance conditions that meet specific statutory requirements.

Free shares and matching shares can be subject to forfeiture. For awards of free and matching shares made before 17 July 2013, a forfeiture period was permitted for a maximum of three years, if the employee either withdrew partnership shares from the trust (in the case of matching shares only) or ceased employment (other than for "good leaver" reasons, such as injury or disability).

From 6 April 2014, it became possible to apply forfeiture provisions to partnership shares and dividend shares provided that they may only be forfeited for at least the price paid/amount of dividend reinvested or, if lower, the market value at the time the shares are offered for sale. Forfeiture was not permitted for partnership shares or dividends shares awarded before 6 April 2014.

Conditional share award plan

Typically, employees only become entitled to the shares once certain conditions are met.

Restricted share acquisition plan

Employers can place restrictions that are removed when conditions are met. However, in the case of private companies, typically restrictions continue after the employees have acquired the shares, as they relate to what employees can do with the shares when they leave employment.

 
14. What are the tax and social security implications when any performance or time-based vesting conditions are met?

SIP

In general, no tax charge or national insurance contributions (NICs) arise if employees withdraw the shares from the trust five or more years from their acquisition or award. The tax treatment of SIPs is covered in more detail in Question 15, SIP.

Conditional share award plan

Once the conditions placed on the shares are met, employees acquire the shares and are subject to tax on the shares' market value at that time. The employer can be liable for this income tax and employee NICs under PAYE, and for employer NICs (see Question 8, EMI plan).

Restricted share acquisition plan

If employees have paid the shares' full market value, with no discount applied to reflect the impact of the restrictions, no tax charge or NICs arise when any restrictions are lifted. If employees did not pay the shares' full market value, the lifting of restrictions triggers an income tax charge (unless the employee and employer elected to be taxed on the full value of the shares when they were acquired). Tax is charged on a proportion (based on the initial untaxed discount) of the unrestricted value of the shares when the restrictions are lifted.

The employer may have to account for this income tax and employee NICs under PAYE, and pay employer NICs.

Sale

15. What are the tax and social security implications when the shares are sold?

SIP

Employees must withdraw their SIP shares from the trust that has been holding them on their behalf before they can sell them. The tax implications depend on when this withdrawal takes place. If employees withdraw partnership, free or matching shares:

  • Less than three years from their award or acquisition: an income tax charge arises on the shares' market value on the date of withdrawal.

  • From three to less than five years from their award or acquisition: income tax is payable on the lower of:

    • their value on the date of award or acquisition price;

    • their value on the date of withdrawal.

  • Five years or more from their award or acquisition: no income tax charge arises.

  • No income tax charge arises in certain good leaver circumstances (which include, for example, employees who leave through redundancy or retirement or by reason of their employment, or their employing company, being transferred out of the group). Tax relief may also be available on the early withdrawal of shares in the event of certain cash takeovers.

If income tax arises, the employer may have to account for this and employee NICs under PAYE, and pay employer national insurance contributions (NICs) (see Question 8, EMI plan). Employer NICs in relation to SIP shares cannot be recovered from the employee.

No income tax arises on the withdrawal of dividend shares after three years. If the dividend shares are withdrawn within three years, the original amount invested is taxed as income under the new dividend tax regime applying from April 2016. A tax-free dividend allowance of GB£5,000 (including dividend income from all sources) is available, beyond which the dividend income is taxed according to the applicable income tax band at the following rates (for the 2016/2017 tax year):

  • 38.1% for additional rate taxpayers.

  • 32.5% for higher rate taxpayers.

  • 7.5% for basic rate taxpayers.

No capital gains tax (CGT) is charged on the shares' increase in value while they are held in trust. Therefore, if the shares are sold immediately on their withdrawal from the trust, there is no CGT liability.

No NICs are payable on sale of the shares.

Conditional share award plan

When the shares are sold, CGT is charged at either 18% or 28%, on the difference between the shares' sale price and the market value when the employee acquired them.

Restricted share acquisition plan

When the shares are sold, CGT is charged at either 18% or 28%, on the difference between the shares' sale price and the market value when the employee acquired them (assuming there is no further liability to income tax under the rules relating to restricted shares).

 

Phantom or cash-settled share plans

16. What types of phantom or cash-settled share plan are operated in your jurisdiction?

Phantom share option plan

Phantom share option plans are the most common type of phantom or cash-settled share plan. In practice, they are less common than plans that actually deliver shares to employees.

Main characteristics. Employees receive a cash amount by reference to share price growth. The plan is structured so that participants receive the same financial reward as they would have received if they had been granted a share option, exercised it later, and immediately sold the shares acquired.

Types of company. Any type of company can offer a phantom share option plan.

Popularity. Phantom share option plans are not particularly popular in the UK (largely due to the cash exposure that they create for the company), although some unlisted companies use them to replicate the economic benefits of employee share option plans.

Grant

17. What rules apply to the grant of phantom or cash-settled awards?

Phantom share option plan

Discretionary/all-employee. Phantom share options can be granted on a discretionary basis.

Non-employee participation. In principle, phantom share options can be granted to non-employee directors and consultants. The tax/national insurance contributions treatment of the phantom share options is different for consultants to that for employees.

Maximum value of shares. There is no maximum award value.

 
18. What are the tax and social security implications when the award is made?

Phantom share option plan

No tax charges or national insurance contributions arise on grant.

Vesting

19. Can phantom or cash-settled awards be made to vest only where performance or time-based vesting conditions are met?

Phantom share option plan

Phantom share options can be structured to vest only when performance and/or time-based conditions are met.

 
20. What are the tax and social security implications when performance or time-based vesting conditions are met?

Phantom share option plan

Employees must usually complete a compulsory procedure (for example, the submission of a notice of exercise) to realise the option's value. If employees had an immediate right to call for cash when the award vests, income tax and national insurance contributions may become chargeable at that point, instead of when the cash award is paid out.

If tax becomes chargeable, which is unusual, it is on the value of the cash award at that time.

Payment

21. What are the tax and social security implications when the phantom or cash-settled award is paid out?

Phantom share option plan

When the employee exercises a phantom share option, income tax is charged on the cash award paid out. The employer must account for this income tax and the employee national insurance contributions (NICs) under PAYE, and must also pay employer NICs. The deadline for payments to HMRC is the same as for employee share plans (see Question 8, EMI Plan). Employers typically recover the PAYE amount and employee NICs from employees by providing in the plan rules that tax/NICs will be deducted from the cash payment before the (net) payment is made to the employee.

 

Corporate governance guidelines, market or other guidelines

22. Are there any corporate governance guidelines, market rules or other guidelines that apply to any employee share plan?

There are a number of different guidelines and obligations that can apply to companies operating share plans in the UK.

Disclosure of directors' remuneration

A revised reporting and voting regime for directors' remuneration in quoted UK companies took effect for reporting years ending on or after 30 September 2013. The regime applies to UK incorporated companies listed on the London Stock Exchange (LSE), an EEA regulated exchange, the New York Stock Exchange or NASDAQ (quoted UK companies).

Although the revised regime represented a significant change for affected companies, in practice, the regime has largely been implemented without issues. Under the revised reporting regime, the directors' remuneration report must contain two separate parts:

  • A forward-looking section on proposed remuneration policy, including:

    • a "future policy table" with a description of each element of the remuneration package and how future remuneration policy relates to the company's strategic objectives;

    • estimates of future payouts based on different performance scenarios; and

    • the policy for termination payments and for hiring new directors.

  • A backward-looking section reporting on the implementation of the remuneration policy in the relevant financial year, including:

    • the total remuneration of each director shown as a single figure; and

    • details of termination payments paid to directors.

There must be a binding shareholder vote on directors' remuneration policy at least every three years. Once the policy has been approved, only remuneration which is compliant with that policy can be paid. If a company wishes to change its remuneration policy (or to make a non-compliant payment) within that three-year period, it must seek re-approval for that revised policy/payment from shareholders. Directors authorising any payment in breach of these rules will be liable to indemnify the company for any loss resulting from their actions.

There is also an annual advisory shareholder vote on the implementation of the remuneration policy. If the advisory vote fails, this will trigger a binding vote on the remuneration policy in the following year (even if no change in remuneration policy is being proposed).

UK Corporate Governance Code

The Financial Reporting Council amended the UK Corporate Governance Code to address a number of issues relating to executive directors' remuneration. The Corporate Governance Code applies to all companies listed on the LSE with a premium listing, including overseas companies. The changes included that malus/clawback provisions should be included in performance-related plans for executive directors. A company without such provisions will be required to explain why that is the case. These amendments apply to accounting periods beginning on or after 1 October 2014.

Private companies

Private companies incorporated in the UK are not subject to guidelines, although their articles of association contain rights and restrictions over shares.

Companies that trade their shares on AIM are subject to rules regulating people with inside information dealing with shares during specified periods. AIM companies must also notify the LSE of certain share dealings by directors and may adhere to institutional investor guidelines (see below, Companies listed on the LSE's Official List), if they have institutional investors.

Companies listed on the LSE's Official List

Companies listed on the LSE's Official List are subject to the:

  • LSE Listing Rules. The Listing Rules, among other things:

    • prohibit certain share transactions by persons holding inside information;

    • require shareholder approval for the adoption of most share plans;

    • require the grant of a discretionary option over unissued shares to have an exercise price at least equal to the shares' market value at the date of grant, unless shareholders give prior approval to the grant.

  • Investment Association (IA) principles of remuneration. The IA is a representative body for institutional investors. The IA principles of remuneration are not mandatory, but companies with a large institutional shareholder base generally follow them. The key IA principles of remuneration for executives' share plans include that awards should:

    • not vest any earlier than three years after the date of grant;

    • only vest if performance conditions have been satisfied (and that those performance conditions should be set by reference to the company's corporate performance);

    • in the case of good leavers or where there is a change of control in the company, vest on a pro-rata basis, with regard to the time elapsed since the grant of the award, and the satisfaction of performance conditions;

    • not be granted over more than 5% of the company's share capital in a rolling ten-year period (there is also an overall 10% limit for all plans, including all employee plans); lapsed options do not count towards these limits; and

    • be subject to malus (that is, downward adjustment of performance-related compensation in certain circumstances) and clawback (that is, the requirement to payback performance-related compensation in certain circumstances).

  • Other guidelines issued by institutional shareholders. There are other guidelines, similar to the IA's, such as those issued by the Pensions and Investment Research Consultants, although the IA's are the most widely followed.

Banks, building societies and investment firms

All banks, building societies and investment firms (as defined under Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions) are subject to a remuneration code (Remuneration Code) originally introduced by the Financial Services Authority (now the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA)).

Organisations covered by the Remuneration Code must establish, implement and maintain remuneration policies, procedures and practices that are consistent with and promote effective risk management. The Remuneration Code includes a number of requirements, including in relation to the deferral and composition of annual bonuses and other variable remuneration. For example, in some circumstances, at least 60% of variable remuneration must be deferred for a period of at least three to five years and at least 50% of variable remuneration must be in the form of shares (or similar instruments).

The Remuneration Code also includes provisions relating to a "bonus cap", as required by the EU. The EU requires banks and other institutions covered by the Remuneration Code to remunerate certain employees (Code staff or material risk takers (MRTs)) by reference to a set ratio between fixed and variable pay. The key aspects of the rules are:

  • Variable remuneration (such as bonuses) for MRTs should be capped at 1:1 of fixed remuneration.

  • There is scope for that ratio to be increased to 2:1 where shareholder approval is obtained.

  • There is a discounted value treatment for up to 25% of variable remuneration which is deferred over at least five years.

In the UK, the cap applies in principle to all firms (including third-country firms) currently caught by the Remuneration Code, but the PRA and FCA have confirmed that proportionality can be applied to the bonus cap (that is, firms below a certain size need not apply the cap).

The rules on the bonus cap apply to variable remuneration awarded in respect of the performance year beginning in 2014.

Further amendments to the Remuneration Code have been made, including provisions on the application of clawback of awards and additional deferral requirements. The minimum period that must be imposed for clawback is seven years, running from the date of award, and firms are required to make "all reasonable efforts" to exercise clawback. New minimum deferral periods have been introduced of up to:

  • Seven years for senior managers.

  • Five years for MRTs who are risk managers.

  • Three years for other MRTs.

The clawback period will also increase for senior managers to ten years in certain circumstances. These new rules will apply to variable remuneration awarded for the 2016 performance year onwards.

Similar rules apply to:

  • Certain investment fund managers under Directive 2011/61/EU on alternative investment fund managers and under Guidelines of the European Securities and Markets Authority (ESMA) from 22 July 2013.

  • Undertakings for collective investment in transferable securities (UCITS) under:

    • Directive 2014/91/EU on UCITS depositary functions, remuneration policies and sanctions from 18 March 2016; and

    • ESMA Guidelines applying to remuneration awarded in respect of performance years beginning in 2017.

  • Insurers and reinsurers under Directive 2009/138/EC on the taking-up and pursuit of the business of insurance and reinsurance from 1 January 2016.

 

Employment law

23. Is consultation or agreement with, or notification to, employee representative bodies required before an employee share plan can be launched?

Consultation with employee representatives can be required by:

  • Agreements made under the Information and Consultation of Employees Regulations 2004.

  • Agreements with an employee representative body.

  • Collective agreements with a union that require consultation before any change to remuneration arrangements.

 
24. Do participants in employee share plans have rights to compensation for loss of options or awards on termination of employment?

It is common practice for employers to exclude an employee's rights under an employee share plan from the scope of any damages that may be awarded on termination of employment (regardless of whether that termination is lawful or unlawful) and this is generally accepted as a valid approach by the UK courts. However, in unfair dismissal cases, an employment tribunal can award compensation that it deems just and equitable. Therefore, it has the discretion to take the loss of share plans benefits into account when assessing the damages payable to an unfairly dismissed employee.

 

Exchange control

25. How do exchange control regulations affect employees sending money from your jurisdiction to another to purchase shares under an employee share plan?

There are no general currency restrictions in force in the UK. However, dealing with certain countries is restricted. If the currency's destination is a country that has difficult relationships with the wider international community, it is prudent to check that no prohibition applies.

 
26. Do exchange control regulations permit or require employees to repatriate proceeds derived from selling shares in another jurisdiction?
 

Internationally mobile employees

27. What is the tax position when an employee who is tax resident in your jurisdiction at the time of grant of a share option or award leaves your jurisdiction before any taxable event affecting the option or award takes place?

The UK tax treatment of share options and awards held by internationally mobile employees (IMEs) is complex. Leaving the UK does not of itself trigger a tax charge in relation to the option or award.

New rules taxing IMEs came into force from 6 April 2015 and apply regardless of when an option or award was granted. Under those rules, if an employee who is resident in the UK at grant exercises an option, or an award vests, while resident in another country (or vice versa), it is necessary to calculate the number of days in the period from grant to vesting, and apportion the gain into income chargeable to UK tax and income not chargeable to UK tax. The aim of the new rules is to limit the proportion of any share income taxable in the UK, and there are specific provisions that protect IMEs against double taxation. An IME could also claim tax relief under a double tax agreement.

The rules for national insurance contributions are similar and also came into effect from 6 April 2015.

An employee can also be liable to capital gains tax on any gain made from selling shares acquired on exercise of the option or receipt of shares during a period of temporary residence outside the UK, if they are within the scope of the temporary non-residence rules.

 
28. What is the tax position when an employee becomes tax resident in your jurisdiction while holding share options or awards granted abroad and a taxable event occurs?

Arriving in the UK does not of itself trigger a tax charge in relation to the option or award.

The UK tax regime for share options and awards held by internationally mobile employees (IMEs) who become tax resident in the UK by the time that a taxable event occurs (inbound IMEs) is the same as for outbound IMEs since the introduction of the new rules (see Question 27). In addition, under the new rules, a UK company can claim a statutory corporation tax (CT) deduction in the following cases:

  • For options exercised/shares acquired by an IME seconded to it from a non-UK company.

  • Where an IME acquires an option/shares by reason of a non-UK employment and at that time (or later) takes up employment with the UK company.

The CT relief is restricted to the amount on which the IME is subject to UK income tax.

 

Securities laws

29. What are the requirements under securities laws or regulations for the offer of shares under, and participation in, an employee share plan?

Companies must comply with the prospectus requirements that apply in the UK in relation to offers of, and participation in, share plans.

A prospectus must be published when securities (including shares) are offered to the public or admitted to trading (Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading (Prospectus Directive)). The Prospectus Directive is implemented in the UK in the Financial Services and Markets Act 2000 and the Prospectus Rules issued by the Financial Conduct Authority (FCA).

Under the applicable requirements, if a company offers securities to employees, it must publish a prospectus if the offer qualifies as a public offer and does not fall under an exemption.

In practice, most share plan offers fall outside the scope of the prospectus requirements or can benefit from a prospectus exemption. The grant or exercise of non-transferable share options is unlikely to fall within the scope of the prospectus requirements, according to the FCA. In addition, a plan generally falls outside the scope of the prospectus requirements if the shares are awarded for free. The exemptions available for share plans are explained in Question 30.

If a prospectus is required, it must contain certain information, including consolidated financial information which must be presented in accordance with international financial reporting standards (IFRS) or an equivalent standard.

Once approved in the company's home member state, a prospectus can be used in all other EEA-member states and remains valid for 12 months (subject to a requirement to publish supplementary information in certain circumstances).

The European Securities and Markets Authority (ESMA) has published short-form prospectus rules that benefit many non-EU listed, third-country companies operating employee share plans in the EU. The short-form prospectus can omit various items of information (as set out in ESMA guidance) which would otherwise be required under a full prospectus.

 
30. Are there any exemptions from securities laws or regulations for employee share plans? If so, what are the conditions for the exemption(s) to apply?

An exemption from the prospectus requirements is available where the securities of the employer (or an affiliated company) are admitted to trading on a regulated market in the EU, or where the issuer has its head office or registered office in the EU, provided that a document is made available containing information on the number and nature of the securities and reasons for and details of the offer (employee share plans exemption).

Companies that are established outside the EU will qualify for the employee share plans exemption if they are listed on an EU regulated market or if they are listed on a "third-country market" that is recognised by the European Commission as being governed by a regulatory regime equivalent to the EU regulatory regime (equivalence decision). In that case, the company will be required to provide "adequate information", including the short information document referred to above. At the time of writing, the European Commission had not issued an equivalence decision in relation to any third-country market.

Additionally, there are other prospectus exclusions or exemptions that companies can rely on when making an offering under an employee share plan, including:

  • An exemption that applies to offers made to fewer than 150 individuals per member state.

  • An exclusion that applies where the consideration for the offer over a period of 12 months is less than EUR5 million (across the EU).

The EU is currently considering a new Prospectus Regulation that would make the employee share plan exemption available for securities listed on non-EU markets, but this is in the early stages of consultation.

 

Other regulatory consents or filings

31. Are there any other regulatory consents and filing requirements and/or other administrative obligations for an offer of shares under, and participation, in an employee share plan?

From 6 April 2014 the HMRC approvals process for CSOPs, SAYEs and SIPs was replaced by a "self-certification" regime. Self-certification means that the company must register the plan with HMRC and provide a declaration to HMRC that the plan complies with the provisions of the relevant tax legislation. Mandatory online filing of year-end returns for all share plans (both tax favoured and non-tax favoured) has also been introduced from the 2014/15 tax year.

Under the self-certification and new registration regime:

  • New CSOPs/SIPs/SAYEs must be registered with HMRC via the PAYE Online service and self-certified. The trigger for registering/self-certifying a new CSOP/SIP/SAYE is the making of the first grant/award under that plan. Registration/self-certification of the plan must then take place by 6 July after the end of the tax year in which the first grant/award takes place.

  • Amendments to a key feature of a CSOP/SIP/SAYE (and certain variations of CSOP and SAYE options) must be notified to HMRC on the year end return and self-certified.

  • In the case of EMI, plans must be registered with HMRC in order that grants of EMI options can be notified to HMRC online. The company must submit an online notification of grant of EMI options within 92 days of the grant, otherwise the options will not qualify as EMI options.

  • Non-tax favoured share plans must also be registered with HMRC in order that year-end returns can be filed online.

  • Once a plan has been registered (and self-certified in the case of CSOPs/SIPs/SAYEs), the employer will be able to file year-end returns online.

  • Penalties for failing to file online will automatically apply.

Employee share plans that fall outside the statutory rules, but provide significant tax or national insurance contributions advantages by exploiting inconsistencies in the law, are likely to have to be notified to HMRC under a specific tax avoidance disclosure regime.

 
32. Are there any data protection requirements or obligations for an offer of shares under, and participation in, an employee share plan?

Employees should be fully informed, in advance, of the collection, processing and disclosure of their personal information in connection with an employee share plan.

The processing must be covered by a registration with the office of the UK Information Commissioner and a series of general data protection principles set out in the Data Protection Act 1998 (DPA) must be followed. These include, for example, a requirement that all processing should meet one of a series of specific justifying conditions and requirements in relation to general fair processing, security and destruction when information is no longer needed. Further restrictions will apply if employee information is to be transferred outside the EEA.

In many cases, companies have taken the approach of obtaining employees' consent to the data processing in relation to an employee share plan as a means of meeting the specific justifying conditions. Some doubt has been expressed as to whether, strictly, this approach is valid and a possible alternative approach may be for the data processing to be justified on the basis that it is necessary for the purposes of the legitimate interests of the company.

Regulation (EU) 2016/679 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data will apply from 25 May 2018 and will impose stricter reporting and consent requirements and higher fines, among other changes.

 

Formalities

33. What are the applicable legal formalities?

Translation requirements

There is no strict legal requirement to translate plan documents into English. However, in practice, it is highly unlikely that a contract entered into with a UK employee would be enforceable were it not written in English (assuming that the employee could not understand the language in which it was written).

E-mail or online agreements

In general, employees can enter into binding agreements under share plans electronically. However, where the share plan involves deductions from the employee's salary (for example, under a share purchase plan), this requires the employee's agreement in advance (see below, Employee consent), which must be in paper form to comply with English employment law requirements.

Witnesses/notarisation requirements

Legal agreements do not generally require witnessing or notarisation. However, in certain circumstances it may be necessary to execute the agreement as a deed for there to be a binding agreement. Where a deed is required, special execution requirements apply (for both the employee and the company).

Employee consent

Employee consent is required for deductions from salary that are not required or authorised by law (or otherwise authorised by the employment contract). See also Question 32.

 

Developments and reform

34. Are there any current trends, developments and reform proposals that have or will affect the operation of employee share plans?

Brexit

Following the UK's vote in June 2016 to leave the EU, the terms of the UK's exit remain unclear. The key areas that may have an impact on share plans include:

  • Securities laws. Currently, the award of shares and options to employees is governed by EU prospectus rules (see Questions 29 and 30).

  • Data protection. Share plans run across the EU involve a flow of information between employing companies and external third parties. This flow between the UK and the EU would no longer be automatic and companies may need to obtain more detailed consent form their employees to collect, process and transfer data in the context of share plans.

  • Share dealing. Regulation (EU) 596/2014 on market abuse (Market Abuse Regulation) applies from 3 July 2016 but the UK may revert back to the previous rules and practice on leaving the EU (see below, Market Abuse Regulation).

Investment Association (IA) Executive Remuneration Working Group

The IA set up a working group to consider executive pay and the group published its final report in July 2016. The report made suggestions on improving executive pay structures and decreasing the quantum of pay. The report highlighted the importance of simplifying remuneration structures and introducing more flexibility. A key recommendation was that remuneration committees should consider whether long term incentive plans (LTIPs) or other structures would be the most appropriate, as it was recognised that LTIPs would not suit all business models.

Market Abuse Regulation

The Market Abuse Regulation came into force on 3 July 2016 and now governs dealings under share plans for companies with securities admitted to trading on an EEA regulated market. While the position for share dealings and share plans is largely the same as before, there are no longer specific exemptions for share plan actions (for example under SAYE or SIPs) and the UK's Model Code has been removed. Analysis will be required for share plan dealings.

Changes to the tax rules on dividends

From 6 April 2016, the system of tax credits for dividends was replaced with a single allowance of GB£5,000. This could have an impact on dividends paid or reinvested under a SIP and could result in basic rate taxpayers becoming liable to tax.

 

Online resources

Official legislation database

W www.legislation.gov.uk

Description. This database is managed by the National Archives on behalf of the UK Government. It preserves an official UK public record of all UK legislation.

Financial Conduct Authority (FCA) website

W www.fca.org.uk

Description. This is the official website of the FCA, which is the financial regulator for the UK as well as the UK Listing Authority. It includes up-to-date versions of, for example, the UK Listing Rules.



Contributor profiles

Sonia Gilbert

Clifford Chance LLP

T +44 20 7006 2041
F +44 20 7006 5555
E sonia.gilbert@cliffordchance.com
W www.cliffordchance.com

Professional qualifications. England and Wales, 2000

Areas of practice. Employee benefits; share incentives.

Liz Pierson

Clifford Chance LLP

T +44 20 7006 2817
F +44 20 7006 5555
E liz.pierson@cliffordchance.com
W www.cliffordchance.com

Professional qualifications. England and Wales, 2002

Areas of practice. Employee benefits; share incentives.


{ "siteName" : "PLC", "objType" : "PLC_Doc_C", "objID" : "1247392369529", "objName" : "Employee share plans in UK (England and Wales) regulatory overvi", "userID" : "2", "objUrl" : "http://us.practicallaw.com/cs/Satellite/us/resource/1-503-1411?null", "pageType" : "Resource", "academicUserID" : "", "contentAccessed" : "true", "analyticsPermCookie" : "22e97be00:15af85a7a5e:55cf", "analyticsSessionCookie" : "22e97be00:15af85a7a5e:55d0", "statisticSensorPath" : "http://analytics.practicallaw.com/sensor/statistic" }