Employee Share Option Schemes - how are they taxed?
Discussion
A freind of mine is starting a new role where he gets RSUs and also the option to join what appears to be an Employee Share Option Scheme.
In the ESOP he saves a fixed £500 a month for a period of 3 years. At the end of the 3 years he can buy shares at either the original price OR a 15% discount to the market price at that time (whichever is the lower). I have two questions
1. That sounds like he makes at least 15% profit. is that correct? The last time I took part in one of these you could either but at the original price OR if the shares were below the original price you'd get your money back. His scheme seems to be the best of both worlds (ie he gains if the stock market goes up, and he makes at least 15% if they go down).
2. How is the profit taxed. My initial thought was that it would be CGT but he seems to think it's PAYE. I don't see how it's something that could be processed via payroll unless it's declared on a P11d in some way.
In the ESOP he saves a fixed £500 a month for a period of 3 years. At the end of the 3 years he can buy shares at either the original price OR a 15% discount to the market price at that time (whichever is the lower). I have two questions
1. That sounds like he makes at least 15% profit. is that correct? The last time I took part in one of these you could either but at the original price OR if the shares were below the original price you'd get your money back. His scheme seems to be the best of both worlds (ie he gains if the stock market goes up, and he makes at least 15% if they go down).
2. How is the profit taxed. My initial thought was that it would be CGT but he seems to think it's PAYE. I don't see how it's something that could be processed via payroll unless it's declared on a P11d in some way.
Your mates gig sounds like a SAYE, Save as You Earn. Common practise these days. My last two employers have what was know as ESPP, Employee Stock Purchase Plan, very similar but with more generous contribution allowances and shorter windows.
My current one works on a 6 month basis and you committed a certain %age of monthly wage (1-15%). For example, let's say 10% = £500 over the 6 month period. So you would have saved £3000 at the end of the last 6 month window. You then had the benefit of buying at 15% off the lower of the start or end price so the net effect is you couldn't lose and your minimum gain is 15%. Not bad benefit for only 6 months.
SAYE is more common in UK companies, BT runs one and yes the idea is you kinda can't lose. Either get your money back or at least a 15% gain. I encourage anyone who can live on <100% of the take home to put the rest in SAYE/ESPP. Its free money and if the markets go your way can be even better than 15%.
In my scenario, the £500/month is already taxed. In my upcoming window i am looking at ~£2000 gain. All shares will be deposited in my account on the buy day and my company will take what i owe in tax over the next 1-3 pay cycles. So i will get stung for ~ an extra £300/month for 3 months after i get the full benefit via my broker. I believe SAYE are much of a muchness.
Another interesting aside. If its a US company you are ONLY entitled to $25000/calendar of ESPP/SAYE purchases.
My current one works on a 6 month basis and you committed a certain %age of monthly wage (1-15%). For example, let's say 10% = £500 over the 6 month period. So you would have saved £3000 at the end of the last 6 month window. You then had the benefit of buying at 15% off the lower of the start or end price so the net effect is you couldn't lose and your minimum gain is 15%. Not bad benefit for only 6 months.
SAYE is more common in UK companies, BT runs one and yes the idea is you kinda can't lose. Either get your money back or at least a 15% gain. I encourage anyone who can live on <100% of the take home to put the rest in SAYE/ESPP. Its free money and if the markets go your way can be even better than 15%.
In my scenario, the £500/month is already taxed. In my upcoming window i am looking at ~£2000 gain. All shares will be deposited in my account on the buy day and my company will take what i owe in tax over the next 1-3 pay cycles. So i will get stung for ~ an extra £300/month for 3 months after i get the full benefit via my broker. I believe SAYE are much of a muchness.
Another interesting aside. If its a US company you are ONLY entitled to $25000/calendar of ESPP/SAYE purchases.
cavey76 said:
Your mates gig sounds like a SAYE, Save as You Earn. Common practise these days. My last two employers have what was know as ESPP, Employee Stock Purchase Plan, very similar but with more generous contribution allowances and shorter windows.
My current one works on a 6 month basis and you committed a certain %age of monthly wage (1-15%). For example, let's say 10% = £500 over the 6 month period. So you would have saved £3000 at the end of the last 6 month window. You then had the benefit of buying at 15% off the lower of the start or end price so the net effect is you couldn't lose and your minimum gain is 15%. Not bad benefit for only 6 months.
SAYE is more common in UK companies, BT runs one and yes the idea is you kinda can't lose. Either get your money back or at least a 15% gain. I encourage anyone who can live on <100% of the take home to put the rest in SAYE/ESPP. Its free money and if the markets go your way can be even better than 15%.
In my scenario, the £500/month is already taxed. In my upcoming window i am looking at ~£2000 gain. All shares will be deposited in my account on the buy day and my company will take what i owe in tax over the next 1-3 pay cycles. So i will get stung for ~ an extra £300/month for 3 months after i get the full benefit via my broker. I believe SAYE are much of a muchness.
Another interesting aside. If its a US company you are ONLY entitled to $25000/calendar of ESPP/SAYE purchases.
Thanks cavey - that's really helpful..My current one works on a 6 month basis and you committed a certain %age of monthly wage (1-15%). For example, let's say 10% = £500 over the 6 month period. So you would have saved £3000 at the end of the last 6 month window. You then had the benefit of buying at 15% off the lower of the start or end price so the net effect is you couldn't lose and your minimum gain is 15%. Not bad benefit for only 6 months.
SAYE is more common in UK companies, BT runs one and yes the idea is you kinda can't lose. Either get your money back or at least a 15% gain. I encourage anyone who can live on <100% of the take home to put the rest in SAYE/ESPP. Its free money and if the markets go your way can be even better than 15%.
In my scenario, the £500/month is already taxed. In my upcoming window i am looking at ~£2000 gain. All shares will be deposited in my account on the buy day and my company will take what i owe in tax over the next 1-3 pay cycles. So i will get stung for ~ an extra £300/month for 3 months after i get the full benefit via my broker. I believe SAYE are much of a muchness.
Another interesting aside. If its a US company you are ONLY entitled to $25000/calendar of ESPP/SAYE purchases.
This is a US company and it sounds almost exactly the same as the ESPP that you describe.
I suppose my questions are
1. How is the "gain" calculated? is it as simple as the difference between the price paid and the market price?
2. If your Employer is taxing you via PAYE I assume the gain is Income tax'able rather than CGT?
Tax treatment varies depending on the type of scheme. The two most common are,
If it's a tax free scheme (SAYE) there will be no tax at the time options are exercised and the exercise price become your base cost for CGT if you decide to hold the shares.
If it's a mainstream executive option scheme you buy the shares at an old lower price (i.e. the price at the time the option was granted or perhaps a discounted price) and if it's a big company you will be PAYE'd on the "free gain" between option price and market price at time of exercise. The market price at time of exercise becomes your base cost for CGT if you decide to hold the shares.
If it's a tax free scheme (SAYE) there will be no tax at the time options are exercised and the exercise price become your base cost for CGT if you decide to hold the shares.
If it's a mainstream executive option scheme you buy the shares at an old lower price (i.e. the price at the time the option was granted or perhaps a discounted price) and if it's a big company you will be PAYE'd on the "free gain" between option price and market price at time of exercise. The market price at time of exercise becomes your base cost for CGT if you decide to hold the shares.
Panamax said:
Tax treatment varies depending on the type of scheme. The two most common are,
If it's a tax free scheme (SAYE) there will be no tax at the time options are exercised and the exercise price become your base cost for CGT if you decide to hold the shares.
If it's a mainstream executive option scheme you buy the shares at an old lower price (i.e. the price at the time the option was granted or perhaps a discounted price) and if it's a big company you will be PAYE'd on the "free gain" between option price and market price at time of exercise. The market price at time of exercise becomes your base cost for CGT if you decide to hold the shares.
Got it - thanks If it's a tax free scheme (SAYE) there will be no tax at the time options are exercised and the exercise price become your base cost for CGT if you decide to hold the shares.
If it's a mainstream executive option scheme you buy the shares at an old lower price (i.e. the price at the time the option was granted or perhaps a discounted price) and if it's a big company you will be PAYE'd on the "free gain" between option price and market price at time of exercise. The market price at time of exercise becomes your base cost for CGT if you decide to hold the shares.
I'm curious from a professional point of view as to how the "free gain" is processed through Payroll and then accounted in the Company nominal ledger but that's probably too nerdy a question even for PH
I participated on my ex-employer's ESPP for about 10 years. I have been retired for several years. I have always retained the shares acquired. They pay dividends that in general pay for holidays.
Over the 10 years the average cost per share to me was 14.4. Yesterday the share price on the NYSE was 165.5. So, an interesting CGT problem for me if ever I come to sell. It is more likely that my wife will inherit the shares, and there will be no IHT liability. The CGT liability will be reset on my death should she subsequently decide to dispose of the shares.
R.
Over the 10 years the average cost per share to me was 14.4. Yesterday the share price on the NYSE was 165.5. So, an interesting CGT problem for me if ever I come to sell. It is more likely that my wife will inherit the shares, and there will be no IHT liability. The CGT liability will be reset on my death should she subsequently decide to dispose of the shares.
R.
The Leaper said:
I participated on my ex-employer's ESPP for about 10 years. I have been retired for several years. I have always retained the shares acquired. They pay dividends that in general pay for holidays.
Over the 10 years the average cost per share to me was 14.4. Yesterday the share price on the NYSE was 165.5. So, an interesting CGT problem for me if ever I come to sell. It is more likely that my wife will inherit the shares, and there will be no IHT liability. The CGT liability will be reset on my death should she subsequently decide to dispose of the shares.
R.
I'm in exactly the same boat as Leaper.Over the 10 years the average cost per share to me was 14.4. Yesterday the share price on the NYSE was 165.5. So, an interesting CGT problem for me if ever I come to sell. It is more likely that my wife will inherit the shares, and there will be no IHT liability. The CGT liability will be reset on my death should she subsequently decide to dispose of the shares.
R.
SAYE share option schemes are a great idea! I worked for a US company so I too have shares on NYSE. Shares doing well since purchase (20 years ago) plus added bonus of current £/$ exchange rate.
Take up the offer - you cannot loose.
anonymous said:
[redacted]
Apologies for the confusion. I was mixing things up, not him. 
He does get both (it's a US tech company). It's the RSUs which vest in 12 months (and then quarterly). I assume the ESPP matures annually?
Tbh I wouldn't be surprised if I got that mixed up as well. It was late when he was telling me....
I opted not to bother with this at a current company when they released it, but interesting to see the thoughts on it. I wasn't actually aware that you got 15% + any upside - for any tech firm that has been hit in the last 10 months (most) there could be some interesting gains to be made doing these if the business is solid (many aren't of course).
Our firm does it twice a year as BSE said above. And RSU schedule (though mine are SO) seem to often be like that with 25% cliff. I've seen another job though where the RSU start vesting straight away, so I wonder if the market is changing somewhat.
Our firm does it twice a year as BSE said above. And RSU schedule (though mine are SO) seem to often be like that with 25% cliff. I've seen another job though where the RSU start vesting straight away, so I wonder if the market is changing somewhat.
Countdown said:
Apologies for the confusion. I was mixing things up, not him.
He does get both (it's a US tech company). It's the RSUs which vest in 12 months (and then quarterly). I assume the ESPP matures annually?
Tbh I wouldn't be surprised if I got that mixed up as well. It was late when he was telling me....
@countdown if he wants someone to talk to let me know, I run the recruitment team for a tech company and have also done so for US firms in EMEA with RSU and ESPP schemes, so if he wants it all explained in plain english let me know, happy to help, I've spent years explaining it to candidates and training recruiters on how its messaged.He does get both (it's a US tech company). It's the RSUs which vest in 12 months (and then quarterly). I assume the ESPP matures annually?
Tbh I wouldn't be surprised if I got that mixed up as well. It was late when he was telling me....
dibblecorse said:
@countdown if he wants someone to talk to let me know, I run the recruitment team for a tech company and have also done so for US firms in EMEA with RSU and ESPP schemes, so if he wants it all explained in plain english let me know, happy to help, I've spent years explaining it to candidates and training recruiters on how its messaged.
Thanks for the offer . Tbh the last time I spoke to him he said he'd got it all figured out. I believe the US HR team did some kind of presentation and Q&A to all the new staff.Gassing Station | Jobs & Employment Matters | Top of Page | What's New | My Stuff