The companies offering shares instead of higher pay

As businesses continue to fight it out to lure in the top talent, many are having to go further than office yoga and free fruit. Thousands of job vacancies now offer employees the chance to buy shares in the company they’re working for, analysis has shown.

Job site Adzuna identified dozens of companies advertising a “company share scheme” as part of their compensation package. Most often, these offers came from smaller companies, putting up discounted or free shares for employees, in exchange for lower salaries.

Shares in such companies can offer big rewards if they grow and perform well, and can offer tax advantages – but there are pitfalls to be mindful of when choosing to be rewarded with company shares.

Here, Telegraph Money explains what company share schemes are, and whether you should take advantage of them.

What is a company share scheme?

Simply put, a company share scheme means employees can own shares in the company they work for. 

For an employee, holding shares means you could end up with a big pay-off (depending on your company’s performance), and you can also benefit from tax reductions, too.

For example, you won’t pay income tax or National Insurance contributions (NICs) on the money you use to buy the shares, and you won’t pay either tax when you come to take the shares if you hold them for at least five years. 

Income tax may be payable if you take shares before this time. You may also have capital gains tax (CGT) to pay if you decide to sell the shares.

These schemes broadly fall into three categories:

• Share award schemes, where employees are given shares for free
• Share option schemes, which allow a worker to buy shares at a fixed price
• Share purchase schemes, which give workers the flexibility to buy shares with a small deposit, paying the rest off later

Specifically, there are four main share schemes you’re likely to encounter, which are all approved by HM Revenue and Customs (HMRC).

Save As You Earn (SAYE): This involves employees entering into a savings contract for three or five years, and using the money you’ve saved to buy shares for a fixed price when the term is up. Savings interest is tax-free, but you might have to pay CGT when you come to sell them. You won’t pay any CGT if you transfer the shares to an Isa or a pension.

Company Share Option Plan (CSOP): You can buy up to £60,000 worth of shares at a fixed price in the future with this option, and you won’t pay tax on the difference between what you pay for the shares and what they’re actually worth.

Enterprise Management Incentives (EMIs): These are particularly popular with smaller companies, where employees can be granted share options of up to £250,000 in a three-year period. You may need to pay income tax and NI if you were given a discount on the market value of the shares (but only on the difference).

Share Incentive Plans (SIPs): There’s no income tax or NI to pay if you keep company shares in the plan for at least five years, and you can also sell them free of CGT if you keep them in the plan until you sell. 

You might be offered shares outside these schemes, but they won’t come with the same tax advantages.

You may also lose the tax advantages if you come to leave the company before the requisite share scheme term is up.

In this case, you might need to repay the income tax and NI relief you’d previously received.

Which companies offer share schemes?

Company share schemes are typically preferred by start-ups and scale-ups, said Andrew Hunter, of Adzuna. 

Mr Hunter said acquiring shares through a scheme “means employees can own a stake in a fast-growing company, and generally options will “vest” over time, meaning they can also act as a retention tool to help businesses hang on to staff”.

Essentially, the hope is that employees will care more about how the company performs, and may be more likely to stay – and possibly more incentivised to work hard. However, it could also mean employees stay longer than they might otherwise want to, if they feel tied to share scheme timelines.

Offering shares as part of a compensation package can enable smaller companies to avoid paying higher salaries, while also encouraging new joiners. 

A small number of more established companies, such as energy supplier British Gas and its parent company Centrica, as well as fashion retailer Next, also offer share schemes, according to Adzuna.

The flexibility offered by some share schemes means some employees will negotiate more shares in exchange for lower pay, Mr Hunter added. 

Are share schemes worth it?

The attractiveness of a company share scheme offer very much depends on your circumstances; some people would rather have a higher salary and aren’t comfortable with the level of risk. Others could see it as a massive draw.

Nick Onslow, a chartered financial planner at Progeny, urged jobseekers and employees considering company share schemes to consider their attitude to risk before committing. 

He said: “When people buy into company share schemes they are trying to benefit from the future success of the company that they work for.

“This means that they are buying into single company shares, which is generally seen as high risk. This may or may not fit their attitude to risk.

“While we all hope that the company we work for does well there are countless examples of firms that have failed, and it is important to consider all the associated risks.”

Mr Onslow also points out that, for a young graduate joining a start-up, entering into a company shares scheme “may be the first time someone has ever invested money”. 

Therefore, it is important to consider the basics of financial planning, such as diversification of assets, and tax implications.

On the last point, Mr Onslow explains: “There are a range of share schemes and the tax treatment will depend on the scheme rules.

“Some mean shareholders pay tax and others – often if people keep the shares or share options for five years – are tax-free.

“People need to make sure they understand the tax benefits of going into any scheme and understand what – if any – tax they might pay when they come to sell the shares. It’s really important not to make decisions based on tax alone, however.”

Mr Hunter also points out that whether an employee’s shares end up proving better value than a higher salary depends on the company’s performance. “But that risk can bring big rewards,” he said.