Employer-employee relationships can be fraught. If your boss asks you if you believe in life after death – it could be a trap! Their next comment might be: “Well, after you to go to your uncle’s funeral, he came here looking for you…!”
On a more serious note - not so fraught are the employee benefits available, especially when employed by one of the bigger companies.
Top of those benefits, apart from bonuses, dividends and promotions are potential share options.
There are a number of ways in which an employer may recompense their employees by affording them the opportunity to acquire shares in their employer’s company in as tax efficient way as possible. In many cases, these mechanisms have replaced the traditional cash bonus system.
The three most popular schemes are:
1) Approved Profit Share Scheme.
The Finance Act, 1982 introduced a scheme which provides a mechanism whereby a company which operates an approved profit sharing scheme may allocate shares to its employees and the employee is, subject to certain conditions, exempt from the income tax charge.
Under an approved scheme an employee may be allocated shares up to a maximum annual limit currently €12.700. Dividends received by the employees in respect of the allocated shares are assessable to income tax in the normal way.
With effect from 1st January 2011, the participating employee is liable to pay the Universal Social Charge (USC) and employee Pay-Related Social Insurance (PRSI) on the value of any shares appropriated under an Approved Profit Sharing Scheme. The chargeable event is at the date of appropriation – the date you receive the shares.
2) Share Options
A share option is a right granted by a company to its employees or directors to acquire shares in the company or in another company at a pre-determined price. The employee or director is not given shares outright but is given the right to acquire them at a fixed price.
In some cases, the employee or director will have to pay something for the option itself. When a person exercises a share option and acquires shares for less than the market value he/she is liable to income tax on the difference between the market value of the shares and the price paid (i.e. the option price).
For share options exercised on or after 30th June 2003, an amount (known as Relevant Tax on a Share Option - RTSO) in respect of this income tax liability must be paid to the Collector-General not later than 30 days after the date on which the share option is exercised. From 1 January 2011, Universal Social Charge (USC) is to be paid with RTSO. PRSI due on any gains realised on or after 1 July 2012 must also be paid with RTSO.
3) Save as You Earn (SAYE)
The purposes of an SAYE scheme are as follows:
* To assist employees in acquiring shares in a company at a discount, without having to borrow or to pay any income tax on the discount.
* To exempt the recipient employee from income tax on the grant and exercise of the options.
* To allow companies a tax deduction for the costs of running the scheme.
The SAYE scheme is generally linked to a formal savings contract between employee participants and a third party financial institution. At the end of the savings period, typically three or five years, employees have sufficient capital to fund the exercise of the options and therefore acquire the underlying share.
The minimum savings requirement is €12 per month. The maximum individual savings contribution cannot exceed €500 per month. These savings are deducted from net income each month, i.e. after tax, USC and PRSI. Any interest or bonus payable through the savings contract at maturity will be exempt from tax and will not be subject to deposit interest retention tax (DIRT).
The advantages of an SAYE scheme are:
* Shares can be acquired by employees at a discount of up to 25% of the market value of the share at the beginning of the plan; Income tax, USC and employee PRSI would normally apply to the value of the discount.
* Tax-free interest is payable on savings; Income tax at 40% would normally arise.
* There is no obligation on employees to exercise options and acquire shares. The total savings can be withdrawn tax-free at the end of the savings period.
* No employer PRSI is payable – 10.75% normally.
Buying or being given a stake in the company you work for has many advantages and many benefits. Loyalty and pride are certainly two characteristics employees should have in buckets before the mention of options. Such incentive schemes should enhance and embellish that loyalty and pride.
John Lowe is a Personal Insolvency Practitioner & managing director of Providence Finance Services Ltd trading as Money Doctor, regulated by the Central Bank and based in Stillorgan Co Dublin. He is the author of Money Doctor 2017 (Gill Books). For more information click on John's website.