Owning shares in your employer or joining your employer’s share schemes such as Save As You Earn (SAYE), Enterprise Management Incentives (EMI) and Restricted Stock Units (RSUs) can lead to significant financial reward when the company is growing. A prime example is Amazon, who came to the UK in 1998. Employees of the ‘start up’ online bookstore were all given RSUs as a bonus to their basic pay, which at the time, were trading under $50 each. Those employees that continued to hold their shares to the time of writing would be sitting on a gain of over 60 times that value now, with each share worth over $3,000 (before HMRC takes up to 20% of the profit in Capital Gains Tax).
Of course, holding single shares of any company is highly risky, especially if that company is also the source of your regular income. Unexpected collapses from firms such as Northern Rock in 2012 demonstrate that holding too much of your wealth in a single source can be dangerous, with the share price taking a 31% tumble in a single day and ultimately becoming worthless.
In this article I discuss at a high level, the common topics our team of advisers get from our clients and more broadly from a recent LinkedIn poll open to my network asking ‘If you get given shares from your employer as part of your compensation, what would you like to know more about?’. With 79% of the votes, ‘When to Keep or Sell’ and ‘Tax Implications’ were the clear winners.
Speaking to an Independent Financial Adviser can help ensure you make the most of these schemes, by providing guidance on mitigating tax liabilities, ensuring you’re not taking too much risk, or over-investing.
When to Keep or Sell?
Deciding whether to keep your employer’s shares or sell up can be a difficult decision, as nobody knows the future valuation of the business – yours could be the next Amazon or the next Northern Rock! However, one of my colleagues has a great analogy to get your initial feelings on it:
Imagine a burglar broke into your house and stole some of the shares you own! But this burglar is a bit unusual as they have left the exact value of those shares in cash on the dining table on their way out. After trying to explain this peculiar situation to the police, would your next action be to re-buy those shares in your company, or would you do something else with this cash?
If the answer is something else, that can be a good indication that you might have a better use for that money and are potentially only holding onto the shares out of loyalty or inertia.
Another reason to sell would be for diversification. As previously mentioned, holding all your savings in one company can be extremely risky. If the industry you work in was to go out of favour by investors or impacted by external events (e.g., Covid), you could see rapid declines in your wealth. To mitigate this risk, you can invest in various types and sizes of businesses from across the globe – that way the impact of a single business’ share price is heavily diluted.
There are no one-size-fits-all solutions when it comes to diversifying your savings, as factors such as risk tolerance, investment outlook and affordability all need to be considered.
When it comes to the share save schemes available, different schemes have differing tax rules, making the process of knowing how much to set aside for HMRC complex. There are three taxes you could be liable to pay and should be aware of when holding shares:
- Income Tax & National Insurance – This is tax you pay on your income. As shares given to you through schemes such as RSUs are seen by HMRC as part of your take-home pay, you are liable to Income Tax & National Insurance on the value of these shares at the time they become yours (known as vesting). This tax does not apply to Save As You Earn (SAYE) or Enterprise Management Incentives (EMIs) – so it’s worth checking with your HR team exactly what type of scheme you are in.
- Capital Gains Tax – This is the tax you must pay on the profit when selling the shares. For example, if you were given the shares at a value of £50 and later sold them for £250, you would be seen as making a £200 profit per share and therefore may be liable to Capital Gains Tax on this. The rates of Capital Gains Tax vary based on the type of asset and your income tax bracket but can be as high as 20% for higher rate income taxpayers when selling shares.
- Dividend Tax – If your company pays out dividends to its shareholders you can be liable for tax on this form of income too. Again, rates vary based on your income tax band, but reach a high of 38.1% if you’re in the additional rate bracket (raising to 39.5% on the 6th April 2022).
The good news is that HMRC gives everyone allowances to mitigate some of their liability. For example, in the tax years 2021/22 and 2022/23 you have:
- £12,300 of Capital Gains tax-free allowance
- £2,000 (plus any Personal Allowance you have remaining) of Dividend allowance
You can also shelter your shares from further Capital Gains and Dividend Tax by holding them in an Individual Savings Account (ISA). Here, everyone can save £20,000 each year in cash, stocks & shares, or a combination of the two and not pay tax on the growth or income produced (either dividends or interest). This strategy only works on future Capital Gains and Dividend Tax, except for shares gained through a Save As You Earn (SAYE) scheme or Share Incentive Plan (SIP), where you have 90 days to move them into an ISA before the tax applies.
Fully utilising your tax allowances can be complex and time consuming to calculate, especially if you’ve been building up the shares over years of service or have them from multiple employers.
In conclusion, receiving shares from your employer can be a great bonus or way to build up savings, however this isn’t without its own risks and other associated costs. Long serving employees or those in senior management positions who have amassed a large quantity of shares, need to be particularly attuned to these as they are most likely to exceed tax-free allowances and have too high a risk with a single shareholding.
Lyndhurst Financial Management can help you make the most of your personally held shares and/or employer’s share schemes, advising on not just the aspects covered in this article but your full financial situation including your pension, investments, insurances, and mortgage. We offer free initial meetings where we can discuss your situation and how we can help – to book, email me at firstname.lastname@example.org.