An employee share scheme is a common method of providing employees with an incentive to help improve a business and its performance.

This is probably the most tax-efficient scheme but it must be open to all eligible employees. There are three main types of plan:

• Employers can give staff up to £3,000 worth of free shares a year;
• Each year, employees can buy a further £1,500 worth of partnership shares from their gross salary, or up to 10 per cent of gross salary, whichever is less;
• Employers can give up to two matching shares for every share the employee buys; and
• All shares are held in a trust. Share dividends can also be held in the trust. Dividends worth up to £1,500 in any given tax year can be invested in new shares, provided these are held for a minimum of three years.

No income tax or National Insurance contributions (NICs) are payable if the shares are held in the SIP for five years. Shares are also free of Capital Gains Tax when they are taken out of the trust. If you take shares out of the trust after five years and then sell them at a later date, Capital Gains Tax may be payable on any increase in value in the period from when the shares were taken out of the trust to the date of sale.

If employees leave the business before shares have been held in the SIP for five years, they:

• Must pay income tax and NICs;
• May have to part with free shares and matching shares;
• The business can get corporation tax relief for establishing, contributing to and administrating the SIP.

For further information please contact the Cobia team on 0845 226 0580 or email info@cobia-uk.com