Despite the pressure building in the public service for higher pay awards, private sector employers claim they are determined to keep to the national pay agreement and limit annual increases to low, single digits.
Pay limits rarely apply, however, when key, high-earning personnel are considered: their remuneration is often bonus-related, but high taxes put different pressures on employers to find the best ways to limit tax and maximise income.
Mr Jim Ryan is a director of the personal financial services division of management consultant Ernst & Young and his office is receiving an increasing number of requests from client firms to find the best ways to remunerate high net worth employees. "This is definitely going to be one of the key issues for next tax year," says Mr Ryan. One obvious solution, but not one that is as widespread as it should be, he says, is the notion of rewarding employees with company shares and share option schemes.
According to Mr Ryan, there are a number of different share schemes available, such as share subscriptions; approved profit-sharing schemes; phantom share schemes (also known as stock appreciation rights) and restricted stock schemes. In the first case, "a full-time director or full-time employee can obtain income tax relief on the cost of investing in eligible shares in the company, or a holding company if the subsidiary is at least 75 per cent subsidiary. A life-time maximum limit of £5,000 applies".
There are three principle conditions: the shares must be purchased at market value and in an Irish-resident or incorporated company and they must not be disposed of for at least three years or the relief will be clawed back.
When shares are sold, "the base cost for CGT is nil", says Mr Ryan. "Bearing in mind that income tax is currently 46 per cent and CGT is 20 per cent, there is a net saving of 26 per cent for employees when they dispose of the shares. They are also entitled to their annual CGT exemption of £1,000. By disposing of shares over a number of years it is possible to avoid any tax liability."
Approved profit sharing schemes have been popular with US high-tech companies here, but should have even wider take-up, says Mr Ryan. They work this way: a bonus scheme is introduced and on the declaration of a bonus the employee either takes it in cash or in the shares of the employer company or a publicly quoted parent company. The cash bonus is subject to the usual PAYE/PRSI deductions, but no income tax applies if it is taken in shares and the scheme is operated under approved conditions.
"Employees can also sacrifice a specified percentage of salary in return for shares," says Mr Ryan. Up to £10,000 per tax year can be transferred to the trustees of the APSS to acquire shares on their behalf. This amount is tax-free on the condition that the acquired shares are not disposed of within three years of acquisition." Any dividends that are paid on these kinds of shares are treated as income and are liable to normal income tax.
A phantom share scheme is different, but also potentially very lucrative, in that an employee is entitled to participate in the growth in value of the company or parent company's stock.
"The employee doesn't physically hold any stock but is awarded a notional quantity of shares," he explains. "If the value of the shares increases over a period of time, the employee is entitled to a bonus equivalent to the value of the increase and related to the number of notional shares held."
Most companies impose certain conditions before starting these stock appreciation rights. For instance, you usually need to agree to work with the firm for a predetermined period and you may not hold the same rights (such as voting rights) as ordinary shareholders. Also, each time a dividend is declared a similar gross amount would be paid by way of a bonus to the employee. Any benefits under this scheme are subject to full PAYE/PRSI.
The restricted stock scheme is one in which the employee is granted shares in the company at no cost or a discounted cost, but is restricted from disposing of the shares for a period of time. Benefit-in-kind applies for this scheme, but the longer the restricted period for the disposing of the shares, the greater the reduction in BIK that may be permitted by the Revenue.
According to Mr Ryan, every year the shares are held usually represents a 10 per cent reduction in the BIK, up to 55 per cent after five years ownership. With CGT at just 20 per cent and an aggregate of the price paid and taxable benefit applying when the shares are disposed of, "significant savings can be realised by employees who take advantage of this scheme".
For more information about share schemes contact your personal financial adviser. Jim Ryan can be contacted at Ernst & Young at (01) 475 0555 or by email: jim.ryan@ie.eyi.com
