Is an employee share purchase plan worth the investment?
Q&A: Dominic Coyle answers your personal finance questions
Traders work on the floor of the New York Stock Exchange. Share purchase schemes are particularly popular with multinationals with a presence in Ireland. Photograph: Spencer Platt/Getty Images
I work for a large US multinational in Dublin and twice a year we can enrol in the company’s employee share purchase programme.
This programme allows employees to put away between 1 and 10 per cent of their gross wages every month for the next six months. Once the six months has passed, the company will purchase the stock at the lowest price in that six-month period and will then take a further 15 per cent off the share price, which seems like a great deal.
What are the tax implications of such a programme and would I be better off putting this money into an AVC or even paying off extra on my mortgage given I am one year into a 27-year term with about €350,000 remaining?
Mr J.G., email
There are a variety of options open to employers these days if they want to include a share option or share purchase element in employee’s remuneration. They are particularly popular with employers like yours – multinationals with a presence in Ireland – as they mimic at least to some degree the sort of remuneration mix that might be offered in the employer’s home market.
From the employee’s perspective there is the potential to share in the success of the company and to do so at a price that is at a discounted rate. However, in the case of the employee share purchase plan, there are no particular tax savings – certainly compared with some other options and also with how similar schemes operate in other jurisdictions.
As you say, employees are invited to set aside a certain amount of their income each month for six months. This is net income – ie it is money that has already been taxed by your employer. As with your company, there will be limits on how much you can put towards an employee share purchase scheme.
At the end of the six-month period, the employees are given the option of using that money to purchase shares in the business. I am not sure where you got your understanding that the purchase price would be at the lowest price in that six-month period. I don’t believe that to be the case. I believe the option is to buy the shares at the lower of the price that prevailed at the beginning of the six-month period and the market price at the end of the period – but only at one of those two points, not at any other time in the period. In Revenue terms, this is called the offer period.
There is no obligation to buy the shares at this point just because the money has been set aside for that purpose. The employee can decline to make a purchase at that time and the money reverts to them as taxed net pay.
The added incentive to make the purchase is that the shares are purchased at a further 15 per cent discount to this lower price.
So, if the shares in your company were trading at $10 at the start of the six-month offer period and at $13 six months, under an employee share purchase plan you would be able to buy the shares at $8.50 – a considerable discount to the market value of the stock at the time you make the purchase.
But here’s the thing. Because of the discount, you have now received benefit in kind and this will be subject to tax as well. And not just income tax, but PRSI and universal social charge as well. The tax will be deducted from your next pay at source by your payroll department.
Worse still, as Revenue explains it, the tax is due not just on the $1.50 per share benefit (the difference between the $8.50 price you paid and the $10 price at which the shares were trading at the lower point of the six-month period); it is due instead on the difference between the price you paid and the market price at the time you made the purchase.
In the example above, when the share purchase was made at the end of the six months, the shares were actually trading at $13. This means you will be paying income tax at your marginal rate plus PRSI and USC on $4.50 a share – the difference between the $8.50 discounted purchase price and the $13 end-offer period market price for the stock.
That certainly knocks some of the gloss off the discount. And then, when you go to sell the shares, you will have to pay capital gains tax on the difference between the purchase price and the price you eventually sell them at.
To compound the headache, there is of course no guarantee that these shares will advance in a smooth upward line over your period of ownership. You could end up out of pocket if the shares give up their gains and return to a price below the level you have paid once tax is included – which in this example will likely be somewhere north of $10.50 a share.
Finally, as most of the companies using this programme are US-based multinationals, there is also a currency risk in this programme. You are in effect betting not only that the company will continue to grow and that its shares will reflect this but also that the value of the euro against the dollar does not work against you while you hold the shares.
So does it make sense?
That does really depend on your financial position. Would you be better off putting this money into a pension by way of additional voluntary contributions (AVCs) or even paying off extra on my mortgage given that you are only one year into a 27-year term with about €350,000 remaining?
Quite possibly you would. Money put into the pension would, within pretty generous limits, be exempt from tax which certainly puts you immediately into a better place that the tax position under a share purchase plan. Of course, it is then invested. How you ultimately fare will depend on the performance of those investments compared with the share price of your company.
At least with an AVC, your investment is more diversified and, as we have said, you are benefiting from far more generous tax relief than under the share plan.
In relation to your mortgage, there is no real tax benefit but then again, your investment risk is also reduced and you are owning a bigger slice of what will generally be your most valuable financial asset. True, prices can go down but they tend to be less volatile than shares.
On the flip side, mortgage borrowings will be about the cheapest money you will ever borrow so you should accelerate payments only if (i) the current level of debt is proving difficult to handle or service, or (ii) you are not likely to have to resort to more costly borrowings for holiday, car, education or home renovation purposes.
It;s a decision only you can make. It is always possible to play both horses by investing less than the maximum 10 per cent of net pay in the company’s shares and using the balance to either invest in a pension or pay down your mortgage - or both.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email firstname.lastname@example.org. This column is a reader service and is not intended to replace professional advice.