Saving tax & incentivising your employees using share awards

The award of company shares, instead of cash based awards, remains a popular method of rewarding key employees. Recent trends amongst UK companies indicate that they are moving away from the award of shares by right following the passing of a period of time towards performance based models. In doing so they can both incentivise employees to reach targets and also help to retain key staff.

From a tax perspective the provision of shares represents a more cost effective option for employers than cash awards. The reason being that Employers PRSI (currently 10.75%) does not apply in the former case. These awards are otherwise dealt with as ordinary remuneration (subject to Employees PRSI and the Universal Social Charge).

In the case of Direct Share Awards these are treated in the same manner as other forms of BIK, whereby the difference between the value of the shares provided and any payment made by the employee is taken as the value of the benefit, and PAYE, PRSI and USC is applied through the company payroll. The employee must pay back the cost of this tax withheld to ensure that they are not subject to a further BIK charge in the form of deemed interest on an employer loan. The employee is subject to CGT on any future disposal, with their base cost being the value on which the shares were assessed to tax (unless they already held shares in the company in which case the first shares acquired would be treated as being sold first).

From the employees point of view it would seem that the share award would be less advantageous than a cash bonus, as they would have to recompense the employer with the tax withheld, rather than receive any net payment themselves. The effect of this tax charge may be mitigated however by the imposition of a time restriction (commonly referred to as a clog) on the sale of the shares by the employee. The greater the length of time the employee must retain the shares, the greater the level of reduction in their taxable value. This is subject to a maximum reduction of 60% where the shares must be retained for a period of time in excess of 5 years.

The effect of this reduction can be significant in the case of a top rate taxpayer. Where this amounted to 60% their marginal rate on the award could be reduced from 52% to 20.8%. The base cost for CGT purposes will likewise be reduced, however the employee would be in a better position given that they would have saved 52% of the abatement amount compared to the effective CGT saving of 30% (assuming the rates were unchanged). The use of the clog also offers a practical advantage to the employer in that it will provide continued motivation to the employee until at least the point where they can dispose of the shares.

Summary

The use of direct share awards represents a relatively uncomplicated alternative to cash bonuses for employers. It provides them with both a tax saving and a means of incentivising staff over a long term period. For the employee the use of a share clog should be considered as this can provide a significant saving if used correctly.

Contacr Robert Halley - OSK Tax.