What is Meant by Employment-Related Securities? - Lockhart Amin Accountants

Starting a new business? Get 20% off our accountancy services for 3 months! 😎

What is Meant by Employment-Related Securities?BlogsWhat is Meant by Employment-Related Securities?

What is Meant by Employment-Related Securities?

October 23, 2024
Blogs
What Does Equity Mean?

Employment-related securities (ERS) schemes allow limited companies to award shares to employees and company directors. Different schemes exist, some of which might offer everyone a tax advantage.

Use the links in the table below to easily navigate your desired section.

Various shareholders own limited companies, each holding a different number and type of shares in the business. These shares can be valuable, as shareholders typically receive a portion of the profits based on the number and type of shares they hold. This payment is called a dividend. So, gifting your employees’ securities and shares is called Employment-Related Securities. Gifting such securities and shares to staff means they are rewarded for the profits they make from their work.

Employees do not need to pay National Insurance contributions if the company uses an approved scheme to reward its employees. This scheme primarily benefits employers and helps them attract the best talent for their company.

Key Advantages Of Employment Related Securities

  • Employee Retention
  • Increased Productivity
  • Better Company Culture
  • Attracts New Talent

Employment-related securities schemes have two major categories.

Tax Advantage

The employee receiving the shares benefits from a tax advantage scheme. For instance, they might not need to pay tax or National Insurance on the value of the share.

Here are examples of tax-advantaged Employment Related Securities schemes

  • Share Incentives Plans
  • Save as You Earn
  • Company Share Option Plans
  • Enterprise Management Incentives

Let’s examine employment-related securities schemes in detail.

Share Incentive Plans

If you receive shares via the Share Incentive Plan, you don’t have to pay Income Tax or National Insurance on their value as long as you keep them in the plan for a minimum of five years. You can remove them from the SIP before then, which will develop tax and National Insurance. There are different ways of getting these shares under a share incentive plan.

Free Shares:

An employer can be awarded £3600 worth of shares in one year free of cost. This can be a superb way to reward employees for continued loyalty.

Partnership Shares

Employees can use their pre-tax salary to buy shares but to a specific limit. An employer can invest up to £1800 or 10% of their annual income, whichever is lower.

Matching Shares:

When the employee buys shares from the company, the employer matches the purchases by offering additional shares to the employee for free. Employers can grant up to two matching shares to employees.

Dividend Shares

Buying shares via a profitable company means receiving dividends. You could use the shares to buy more schemes and increase your holding.

You only have to keep the dividend shares for three years before they become tax-free instead of five years, which is standard for other SIPs.

Save As You Earn

The save-as-you-earn scheme, also called Sharesave, allows employees and directors to have a 3-5-year savings contract to keep aside their £500 salary every month. At the end of the agreement, you can use the money accumulated in the savings of the SAYE scheme. With this amount, they can buy shares from the company (with a 20% discount).

If there is a decline in the market value of shares, you can take your cash back with any interest earned tax-free.
If the shares increase in value and the employer brings a discount in price, you will profit.

You won’t need to pay tax or National Insurance based on the difference between pricing and the market price. However, you may have to pay Capital Gains Tax if you sell the shares. The other choice is to transfer the shares to ISA within 90 days of the scheme ending or transfer directly to a pension. This means you only have to pay Capital Gains Tax if the share increases its value between the time of purchase and the day you transfer it.

Company Share Option Plans (CSOP’S)

Company share option plans are a savings scheme in which you don’t contribute monthly. However, the company offers employees and directors the chance to buy up to £60000 worth of shares at a fixed rate.

The price for purchasing a share remains fixed and can’t be lower than the market value of shares when the option is granted.

It is best to buy shares when their market value increases. As long as you have them for three years, you don’t need to pay income tax or national insurance based on the difference between what you paid and what they are worth.

However, if you sell the shares, you must pay capital gains tax and consider the annual exempt amount.

Enterprise Management Initiatives (EMI’s)

In enterprise management incentive schemes, employers reward employees with valuable company options. The company can grant employees share options worth up to £250000 for three years. However, this scheme is not available for every company, only for those with around £30 million in assets. When given the choice to purchase shares, employees don’t have to pay income tax or national insurance if they have bought shares for the price of market value.

However, if the employees get a discount while buying shares, they must pay income tax and National Insurance on the difference between the profit payment they receive and the share’s worth.

EMIs are especially beneficial for companies in growth mode that lack cash. The company can use the initiative to increase its employees’ salaries and allow them to buy shares from a valuable company.

This will help businesses attract good employees who can’t be paid lower salaries. However, from an employee’s point of view, the company can take a portion of their wages to grow while they make more money later, which will not lead to Income Tax or National Insurance.

Non-Tax Advantage

As a company, you may choose a non-tax-advantaged scheme to grant shares. You select this scheme thinking it’s more appropriate, and your employees will pay tax on shares when they exercise their options.

How can I Register for an ERS Scheme with HMRC?

Every workplace employment-related securities scheme should be registered with HMRC to take advantage of every tax benefit. Even if it is a one-off gift of shares.
Log in to your PAYE Online account and add all the employment-related security details to your company’s profile before registering for this scheme. If you are new, you must sign up for PAYE first, which will take up to 5 days.

In most cases, the deadline for registering for the new Employment Securities scheme is the 6th of July, following the end of the tax year it was created. Enterprise Management Incentives have a different deadline, which must be registered within 92 days of being granted.

You must file an employment-related security return if you have an active ERS scheme. Even if you were not actively transferring shares in the specific year, you must submit a ‘nil return.’ This is mandatory if any scheme is active.

There are some exceptions where an ERS return is not required. Let us give you an example.

  • If you own a limited company and want to gift shares to someone (your close friend or you have a family relationship), you won’t need to complete an ERS return.
  • The ERS form you have depends upon the kind of scheme you need to report on. So make sure you download the proper form.
  • Upload the completed form to the ERS Online service using the Government Gateway User ID and Password.
  • The password and ID should be the same as when you told HMRC about the scheme.
  • If I Want to End The ERS Scheme, What Will Happen?
  • Inform HMRC if you decide to end any Employee Related Securities scheme. You will need the same government gateway ID and password that you use to set up the scheme. You will also need to provide the end date of the ERS closing scheme.

What is Meant by Employee Benefit Trust?

An employee Benefit Trust is a type of discretionary system that employers can set up to incentivise and motivate staff. The benefit held by the trust might include

  • Pensions
  • Sick pay
  • Shares or other things

They are sometimes used as a way for employers to make their share available to employees under an ERS.

What is the Working Process of EBT?

The working process depends upon the benefits the EBT provides to its recipients. An example of EBT is holding shares on behalf of its employees. Although the employees are not part of these shares, they still benefit from it. The employees are also entitled to receive dividend payments from the company’s profit.

Leave a Reply

Your email address will not be published. Required fields are marked *