Introduction to share schemes

Produced by Tolley

The following Personal Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Introduction to share schemes
  • Introduction
  • Tax-advantaged schemes v non tax-advantaged schemes
  • Choosing an incentive plan
  • General considerations
  • Cash, options or shares
  • Design considerations
  • Risk areas
  • Using employee benefit trusts
  • Insufficient experience
  • More...

Introduction to share schemes


Historically, the development and use of share schemes can be linked to companies seeking to use the rules to reward employees and directors in a way that did not, typically, attract income tax and national insurance contributions. However, as with all such schemes, the legislation has developed in order to ensure that payments by way of salary or bonus could not be simply recategorised in this way and paid out with lower (or even no) tax due.

The share schemes legislation sets out a wide range of scenarios where income tax and, potentially, national insurance are due on transactions and events that involve shares and securities, particularly those where the recipients have an employment relationship with the company.

However, share schemes are still a popular method of incentivising employees and there are a number of specific plans set out by tax legislation for companies to use. For commentary on why share schemes are popular methods of retaining staff, see the Why use a share scheme? guidance note.

From 6 April 2014, share schemes, including share option schemes, no longer need to be approved by HMRC in advance of award of the shares or grant of the option. Instead, the company must provide notification within a certain time frame and self-certify that a scheme meets the criteria to benefit from the beneficial tax rules. Share schemes that were previously known as ‘approved’ schemes are now referred to as ‘tax-advantaged’ schemes.

Given that tax-advantaged schemes confer tax benefits on the shares or options issued, the terms and criteria for qualification have been drawn by HMRC on a narrow basis.

Where a share scheme is drafted outside of these rules it was known as an ‘unapproved plan’ prior to April 2014, and a ‘non tax-advantaged’ scheme after that date.

This guidance note does not consider the ‘employee shareholder’ scheme which ran from 1 September 2013 to 30 November 2016, where employees gave up certain employment rights in exchange for tax-advantaged

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