Once thought of as something offered only by Silicon Valley start-ups and emerging industries, employee share schemes are becoming increasingly popular as small and medium businesses look for new ways to incentivise their employees.
Employee share schemes, which are also known as employee share purchase plans or employee equity schemes, offer workers the opportunity to become invested in the company they work for on a deeper level while kick-starting their financial future.
By participating in an employee share scheme, the value of an employee’s shares is tied directly to the performance of the company they work for. In this way, they have a direct interest in the success of their company and are more likely to work hard to ensure said company performs well.
But, just like many aspects of your financial world, understanding the pros and cons of participating in an employee share scheme can be challenging without expert advice to guide you. Between navigating the tax implications to knowing whether participating in a scheme is the right decision for you, it can be hard to know where to start when it comes to understanding employee share schemes.
To help make understanding employee share schemes easier, this guide will cover:
- What an employee share scheme is
- The benefits of employee share schemes
- The downsides of employee share schemes
Or, if you’re looking for advice on how your specific employee share scheme could fit into your overall financial world, our team of expert financial advisors can help. With professional financial advice tailored directly to your particular financial circumstances, understanding your employee share scheme becomes simple.
All you have to do to get started is get in touch.
What exactly is an employee share scheme?
Employee share schemes give employees shares in the company they work for or the opportunity to purchase them.
These shares can usually be bought in a variety of ways, including:
- Through salary sacrifice over a set period
- By using the dividends received on shares already owned
- Through a special loan from your employer
- Upfront from your pocket
Shares in an employee share scheme usually come in two forms: options, which can be seen as a promise of shares you then have the option of purchasing after a certain period has passed, and shares themselves.
The chance to participate in an employee share scheme may be offered to high-performing individuals, where the shares become a reward for their performance or as a form of remuneration in place of a higher salary. Increasingly, high-quality employees in senior positions are coming to expect share incentives of this kind as part of their salary package.
Due to this, offering an employee share scheme becomes a way for small and medium businesses to attract high-quality staff who may end up at a large company offering a greater salary package otherwise.
Employee share schemes also create a way for business owners to encourage staff productivity and teamwork by offering employees a financial interest in the success of the business.
And this is all in addition to offering you flexibility with your salary package, which becomes particularly important for those of you earning a high income as a way of lowering your tax obligations.
What are the benefits of an employee share scheme?
As a way of bridging the gap in interests between employees and employers, employee share schemes have a number of benefits for both parties. These include:
Improving Employee Performance
From an employer’s perspective, an employee share scheme provides a powerful way for increasing the productivity of their staff. By giving you an opportunity to earn shares in the company you work for – making you a valued investment partner as well as an active member in your company’s success – you are likely to work harder to help the company succeed.
After all, the value of a company’s shares is dependent largely on how that company performs, which in turn can be linked back to the productivity of the team behind it. Participating in an employee share scheme ensures that all employees have a compelling reason to do their best to help the company succeed.
Providing An Introduction To Investment
For many of you who have been offered the chance to participate in an employee share scheme, the shares you purchase or are given may be the first shares that you own. As such, they form the basis of your investment portfolio and provide you with a way to begin growing your wealth through further investment.
By participating in an employee share scheme, you gain an opportunity to start creating a profitable investment portfolio that you may not have previously had access to. If managed correctly, this investment portfolio could help you achieve financial success and security, as well as those financial goals you may not have thought possible.
What are the downsides of an employee share scheme?
Employee share schemes have both benefits and downsides, which should be considered carefully. A few of these downsides include:
A Lack of Diversification
If you participate in an employee share scheme without having an investment portfolio outside of your company, it’s likely that all of your income streams are tied into one company. This means that both your salary and the performance of your investment portfolio is dependent on the success of your employer.
At My Wealth Solutions, we firmly believe that a diversified investment portfolio is one of the keys to financial success and security. By dividing your wealth across shares from a number of different companies, in a variety of industries, you are better prepared to whether any fluctuations that may occur in the stock market.
While participating in an employee share scheme may provide you with a way to enter the investment market, it’s important to diversify your portfolio beyond that of just those shares gained through the scheme to avoid taking a significant financial hit if something were to happen to the company you work for.
Tax Implications When Vested
If you decided to participate in your employee share scheme by earning options, you would likely have been told that you must wait for a specified vesting period to pass before you’re able to own shares in the company. This vesting period usually lasts for a number of years, after which you’ll be able to purchase your vested shares and gain complete ownership over them. These vested shares become available at the price set out when you originally received your options, known as the exercise or strike price, which is usually lower than the current value of the shares.
However, depending on the type of shares offered by the company, these vested shares may be subject to a tax based on the discount income amount you received by purchasing the share options originally. Similarly, there is the possibility of receiving special tax concessions based on how your employee share scheme is structured.
As employee share schemes can be extremely complicated, it’s important to seek the advice of a professional on exactly what the tax implications are for your particular financial situation and employee share scheme.
In fact, having the guidance of an experienced financial professional is essential to ensure that participating in your employee share scheme is the right decision for you and, if so, how you can make the most of this arrangement.
We can help you do just that.
All you have to do is let us know how we can help.