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HMRC internal manual

Business Income Manual

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Specific deductions: employee share schemes: approved schemes

The approved schemes which give favourable tax and NICs treatment to employees and employers are summarised below.

Share Incentive Plans (SIP)

S488-S515, Sch2 Income Tax (Earnings and Pensions) Act 2003

These are share award plans for all employees. Originally known as All Employee Share Ownership Plans (AESOPs), they were renamed SIPs in 2001.

Companies can give up to £3000 worth of ‘free shares’ a year to each employee. Employees can buy up to £1500 worth of shares a year (‘partnership shares’) and companies can reward this commitment by giving up to two ‘matching shares’ for each share an employee buys. A fourth type of share called ‘dividend shares’ can be purchased using money from dividends received in respect of plan shares. A SIP must be operated through a specially constituted trust.

Enterprise Management Incentives (EMI)

S527-S541, Sch5 Income Tax (Earnings and Pensions) Act 2003

Under EMI, companies with gross assets not exceeding £30 million can grant tax-advantaged options over shares worth up to £250,000 (at the date the options are granted) to each of any number of employees, subject to a total share value of £3 million. Tax and NICs advantages apply. Individual EMI options can be granted without setting up a scheme and so there are no specific statutory deductions for setting up costs.

The corporation tax affairs of companies offering EMI options are dealt with by Small Companies Enterprise Centres (SCECs) or, if the company is also a pharmaceutical company, by the relevant Pharma Sector area office.

SAYE option schemes

S516-S520, Sch3 Income Tax (Earnings and Pensions) Act 2003

SAYE (also known as ‘Sharesave’) schemes must be open to all employees and directors. Participants save up to £250 per month to acquire shares by exercising options at the end of a three or five-period (originally schemes could include a seven-year savings period). Tax advantages include specific statutory deductions for setting up costs. SAYE schemes can be operated with or without a trust. A qualifying employee share ownership trust (QUEST) may be used in conjunction with a SAYE scheme, but this is not a requirement.

Company Share Option Plans (CSOP)

S521-S526, Sch4 Income Tax (Earnings and Pensions) Act 2003

CSOP schemes may be open to selected employees. Participants can be granted up to £30,000 worth of options in a three year period. Tax advantages include specific statutory deductions for setting up costs. CSOP schemes can be operated with or without a trust.

Qualifying Employee Share Ownership Trusts (QUESTs)

Sch5 Finance Act 1989

Although specific statutory deductions for contributions to QUESTs were abolished for accounting periods starting on or after 1 January 2003, the statutory deduction for setting up costs continues to be available. In practice it is unlikely that a new QUEST would now be set up.

The legislation for statutory deductions for contributions to QUESTs included provision for a charge to tax to be made if the trustees breached certain specific requirements. The legislation governing the charge remains in force. Although the charge is intended to withdraw, in whole or in part, the relief given to contributing companies, it is imposed on the trustees in the first instance because only they have control over their actions and it would therefore be inappropriate to impose a charge on the contributing companies.