Five Questions About: Share incentive schemes

What are they?

Share Incentive Schemes – also known as Share Incentive Plans – were launched by the Government in July 2000. If you work for a participating company you can become a shareholder and benefit from attractive tax breaks.

How does it work?

Employers can give workers up to £3,000-worth of "free shares" each year. Staff can choose to buy additional "partnership shares" out of their gross pay. The amount you can buy is capped at the lower of £1,500 in each tax year, or 10 per cent of your salary. For each partnership share an employee chooses to buy, an employer can then give up to two free "matching shares". If your shares perform well, you can choose to reinvest any dividends into more shares which are logically referred to as "dividend shares".

When can I take my shares out of the scheme?

Any time – but you will have to leave them in the plan for five years if you want the profit you have made to be paid free of income tax and National Insurance (NI). If you hold the shares for only three years, just their initial value will be tax and NI-free. Profits on dividend shares become tax and NI-free after three years.

Does every employer offer a scheme?

Unfortunately not. Some 13,000 offer schemes, and the number is increasing. Even if your employer does offer a scheme, remember that government figures are only caps: it can choose to offer as much or as little as it likes to employees under those limits.

Are there any disadvantages to the schemes?

Obviously the value of your shares can go down as well as up. It will also leave you more exposed to your company's fortunes: if it goes bust, you have lost your job and your shares.

This information is provided by Moneysupermarket.com in good faith: neither that company nor The Independent can be responsible for its accuracy. It should not be relied upon in any investment decision, for which you should consider professional advice. The price of investments can go up as well as down and past performance cannot be relied upon as a guide to future performance.