What Is Employee Share Scheme: Types, Benefits and Taxes

An employee share scheme lets workers own part of the company, often through discounted shares or stock options. This gives employees a stake in the business while helping employers keep and motivate talent. Different schemes work in different ways, with some based on options and others on performance, but all come with specific rules and possible tax consequences.

A financial advisor can also help you decide when to exercise options or sell shares to make the most of your benefits.

How an Employee Share Scheme Works

At its core, an employee share scheme is a program that allows employees to acquire shares in the company they work for, often at a discount or under favorable conditions. The goal is to align employee interests with company performance, creating a sense of ownership and motivation. These schemes can involve offering shares directly, granting share options to be exercised later or awarding shares based on specific performance targets.

When an employee joins a share scheme, they may receive granted shares outright or get the option to purchase them in the future at a set price. Many programs use a vesting schedule, which means employees gain full ownership of the shares or options gradually over time. This approach encourages retention and ensures that employees remain committed to the company’s long-term success.

In option-based schemes, the employee can buy shares at a predetermined price, which is often lower than the market rate, once certain conditions are met. If the company’s value rises above the set price, employees can potentially profit by exercising their options and selling the shares at the higher market value. However, this also means there’s an element of risk if the share price falls below the agreed-upon price.

If employees own actual shares rather than options, they may also receive dividends, which are a portion of the company’s profits that it distributes to shareholders. This offers a more immediate financial benefit alongside any future gain from selling the shares. The value of these dividends can vary depending on the company’s performance and profit-sharing policies.

Types of Employee Share Schemes

Employee share schemes can take many forms, each with its own rules, benefits and potential drawbacks. The right scheme for you will depend on factors like your role, the company’s goals and your comfort with risk. Below is an overview of some of the most common types:

Restricted stock units (RSUs). RSUs are a promise to deliver shares to an employee after a vesting period, often contingent on continued employment. They don’t require the employee to purchase the shares, making them lower risk than share purchase or option plans.

Share option plans. These give employees the right—but not the obligation—to buy company shares at a predetermined price after a set period or once certain conditions are met. If the market price rises above the set price, employees can profit by exercising their options. However, if the price falls, they may choose not to exercise them at all.

Share purchase plans. In these schemes, employees can buy shares, often at a discount, using their own funds or through salary deductions. They gain immediate ownership of the shares. This means they can benefit from dividends and potential share price growth from day one.

Performance share plans. Shares are awarded based on meeting specific performance targets, such as revenue growth, profit margins or personal KPIs. These plans aim to directly link employee rewards to the company’s achievements and encourage high performance.

Benefits of Investing in an Employee Share Scheme

One benefit of an employee share scheme is the opportunity to build long-term wealth. Buying shares at a discounted price creates the potential to profit if the company’s value rises, which can be especially meaningful in high-growth businesses.

Employee share schemes also give participants a direct financial link to company performance. When the business grows, employees may see gains from selling shares at higher values as well as from dividend payments. This creates a structure where company success and employee reward are tied together.

Holding a stake in the business can also influence how employees view their role. A sense of ownership often encourages stronger engagement, collaboration and productivity, as employees understand that company performance can directly affect their own outcomes.

In some regions, share schemes also benefit from favorable tax treatment. This can include reduced tax rates on gains or deferred taxation on certain events. These features can increase the financial appeal of participating, though understanding the specific rules and eligibility requirements is essential before making decisions.

How Employee Share Schemes Are Taxed

The taxation of employee share schemes depends on the type of plan, the timing of share acquisition and the laws in your country. In some cases, you will pay taxes when you first receive the shares or exercise your share options. In others, you may not owe tax until you sell the shares and realize a gain. Understanding when tax liabilities arise is essential to avoid unexpected bills.

If you receive shares at a discount or for free, the difference between the market value and what you pay is often treated as taxable income. Later, when you sell the shares, any increase in value is usually subject to capital gains tax. The rates and thresholds for these taxes vary. As such, the overall impact on your earnings will depend on your personal circumstances and the jurisdiction’s rules.

Bottom Line

Employee share schemes are taxed based on the type of plan and when you receive or sell the shares.

Employee share schemes can be a powerful way to build wealth, deepen your connection to your workplace and share in the rewards of the company’s success. Though the potential benefits are attractive, it’s important to understand the type of scheme you’re joining. Different schemes can carry different risks, and taxes may affect your returns.

Investment Planning Tips

A financial advisor can help you evaluate the risks, tax implications and long-term fit of an employee share scheme within your overall financial plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you want to know how much your investments could grow over time, SmartAsset’s investment calculator can help you get an estimate.