Profit-sharing arrangements are to become more attractive for companies and employees with the extension of tax relief to Save As You Earn schemes.
The initiative - to be detailed in the Finance Bill - is expected to be based on the UK model, which allows employees to save a portion of their gross salary over a fixed period to buy shares in their company at a future date. For tax purposes these schemes are regarded as consisting of two separate elements, a share option scheme and a savings scheme.
To join such a scheme, employees agree to save a set amount of basic salary, usually for a period of between three and seven years. At the same time they are granted options to buy shares based on the amount of money to be saved at the end of that period.
Through share options, employees are given the right to purchase shares at a future date at an agreed price. The options are generally priced to offer employees a significant discount to their market value at the time the contract is agreed, with discounts usually of the order of up to 20 per cent.
Most SAYE schemes are expected to lodge employee savings in the National Instalment Savings Scheme from An Post, which provides a tax-free bonus on those funds based on a certain rate of interest. Other financial institutions such as building societies and banks can also be used.
The amount of money that can be saved is likely to be capped. In the UK, where such schemes were established in 1972, employees can save up to £30,000 over their lifetime. Some analysts suggest the Government may initially look to cap savings at around £10,000.
At the end of the savings term, employees are under no obligation to exercise their share options and, as such, are protected from any downturn in the price of the company's shares.
They can opt to use their savings to buy some or all of the shares, they can decide to take their savings as a tax-free lump sum, or they can hold their funds on deposit. Those who purchase shares and later sell them will incur capital gains tax liability as normal.
The Irish Business and Employers' Confederation has been urging the Government to encourage new ways through which employees can participate in profit-sharing schemes, as it says current schemes are limited.