In the past 10 years, an estimated £100bn of shares have been transferred to employees as companies start to recognise the benefits of giving employees an incentive to work harder for the good of the business.
If you've been offered a share option scheme, you want to make sure it works for you and accumulates over the years. Many employees who have taken full advantage of share plans offered by their employers have built up investments worth more than £100,000 over a 20 year period.
In this section we take a look at the different share schemes available and how they work. The types of schemes and the rules governing how they work varies from one employer to another. You should always check the detail of your company's scheme, but this section should answer most of your questions.
TYPES OF SHARE SCHEMES
Share Option Schemes
A share option is the right to buy a share at a fixed price at some time in the future. For example, Joe Bloggs works for TelCo Plc. The current share price is £1 a share. He may be given the option to buy 1,000 shares in TelCo Plc for £1 each in three years time. This is a share option.
The attraction for the employee is that if the share price increases by the time the option is exercisable he or she will make some money. If the share price falls then the employee does not lose as he or she simply chooses not to exercise the right to buy.
Using the above example, if, in three years' time, the share price has risen to £2.50 a share Joe can buy 1,000 shares which are worth £2.50, yet only pay £1 for each one. He can sell these immediately for the market rate (£2.50) or keep hold of them. He will have made a profit of £1,500.
If the price has fallen to 90p a share then Joe still has to pay £1 for a share which is worth only 90p. Obviously he would be foolish to buy these shares in this situation, so he simply does nothing. An option is only a right for him to choose whether to buy the shares; he cannot be compelled to buy them.
To the employee this is a one-way bet. He or she has been given the right to make money without any risk. He or she doesn't even pay for the shares until they have risen in value.
A number of share schemes involve shares being given to employees. Again, the details will vary. Some companies will make a one-off payment to staff; others will give shares based, for example, on length of service.
A common scheme is the Buy-One-Get-One-Free (known, affectionately, as a BOGOF scheme). These encourage employees to make a financial commitment themselves. This is not an option because the employee receives the shares immediately. However, because the employee gets one free share for every one he or she buys, this is similar to getting a 50 per cent discount.
There are no limits to the variations of plans that companies can introduce. Many American companies offer their UK staff a share plan which involves the employee saving up to 12 per cent of their salary each month. This is then used to buy shares at 85 per cent of the lowest share price at the beginning or end of the year. This sounds very complicated, but these schemes are popular because employees are guaranteed at least a 15 per cent instant profit.
Save As You Earn share schemes
The most popular type of share scheme is known as a 'Save-As-You-Earn' plan, or a 'ShareSave' plan. More than one million UK employees are in these particular schemes, which are set up scheme by the employer.
Each employee starts a savings account, usually with a high street bank or building society. The employee must save regularly - up to £250 per month for a minimum of three years. Interest is paid on these savings. At the end of the savings period the money in the account is used to buy shares at a discount of up to 20 per cent of the market value at the time saving started.
For example, TelCo shares are worth £1 in April 2004. The employee could save £200 per month for three years. With interest, he or she would have a savings fund worth about £8,000 in April 2007. He or she would then be able to buy shares for 80p. This gives the employee the right to buy a total of 10,000 shares (£8,000 / 80p).
If, by April 2007, TelCo's share price is £2.50 a share, the employee can then sell these shares and make a profit of (£2.50 - 80p) x 10,000 = £17,000.
Even if the share price has fallen to 90p the employee would still make a profit because he or she can buy the shares at a cheaper price. If the employee chooses not to buy the shares then he or she simply collects the savings and interest.
For some employees this commitment to saving can be a problem, but the legislation, and not the employer, demands this. The more the employee saves, the more shares he or she can buy and the greater the profit.
SHARE SCHEMES AND TAXATION
Shares and Share Options attract tax. The full details will vary from plan to plan. With careful, but easy, planning the tax can usually be avoided.
Your employer should be able to give you guidance as to the tax treatment. Check any brochures they send you, as tax will almost always be covered.
Make sure you fully understand what you need to do as nasty shocks can arise. Remember that tax law frequently changes. You should check the position before taking any action as it may have changed from when you first joined the scheme.
Many American companies have share plans for all their employees all over the world. While these work well for their US-based staff this can be very complicated for UK tax purposes. Make sure your plan is very carefully explained to you.
TOP TIPS FOR YOUR SHARE SCHEME
This section is for people who are considering joining their company's share scheme.
Don't resign too quickly!
Most share option schemes are designed so that you will lose all rights if you resign before the share option becomes exercisable. If you are thinking of leaving and the options are about to become active, then consider waiting for the option to become exercisable, make your profit and then resign.
What happens if the company is taken over?
Takeovers and mergers happen all the time. Some plans will allow early exercise of an option, some options will disappear altogether. Check with your scheme administrators.
Check your statements
Most plans will give annual statements. Check these carefully as mistakes often happen. Your share plan could be the cornerstone of your investment policy so check it!
Restrictions on your shares
Some schemes prevent employees from selling their shares immediately, or there may be higher tax charges if the shares are sold within three years. Check this out in advance as this can cause unexpected difficulties.
Companies that give shares to employees rarely include the value of shares as part of a pensionable salary. This may cause a loss of benefit if you are close to retirement and in a pension plan that pays a pension based around your final salary. Check the position carefully before signing up to a share plan.
Check the share price regularly
All share prices will change on a daily basis. Just because you are sitting on a good profit today doesn't mean it will still be there in six months. Check the share price and take action if you want to sell.
Keep a balanced portfolio
Be very careful about keeping a large share holding in a single company, even if it is the company you work for. Consider selling some of your shares and investing elsewhere as soon as you can.
Complete your tax returns carefully
As a member of a share plan you will almost certainly be required to complete a tax return. You must do this on time, the deadline is 30 September after the tax year if you want the Inland Revenue to calculate the tax due, 31st January if you want to do it yourself.
Remember you will need to request supplementary sheets from the Inland Revenue. These are downloadable from the Inland Revenue's website, or allow a couple of weeks if you want them sent to you by post. If you send your tax return in late you will automatically be fined at least £100. Keep copies of all documentation, especially your statements.
Excluded from your scheme?
Some companies will exclude certain categories of employees from their scheme. This is usually based on length of service. For example you might have to work for 12 months before you can join.
Most of these exclusions are perfectly legal, but if you want to join and feel that these restrictions have a racial or sexually discriminatory impact then you may be able to challenge the restriction.
Until a few years ago it was common for share schemes to exclude part-timers of both sexes. However this was found to be sexual discrimination as most part-time workers were women.
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