Employee Share Ownership Schemes

George Howarth Excerpts

Tuesday 6th September 2022 Westminster Hall

[Sir George Howarth (Knowsley) (Lab)]

I beg to move,

That this House has considered reform of employee share ownership schemes.

It is, as always, a pleasure to serve under your chairmanship, Sir Edward. I thank the Chartered Governance Institute UK & Ireland for the invaluable briefing it provided to help me prepare for this debate. Despite the participation of close to 2 million people, employee share ownership plans remain remarkably low profile and poorly understood. If we are to reform employee share ownership plans, which I believe is long overdue, we need to ensure that Members of this House understand what those plans are, and the problems that they face.

Let me begin by explaining why employee share ownership schemes are unique. They bring together employees, employers and the Government into a contract, with each party making a commitment. First, employers offer their staff the opportunity to acquire shares in the company, often at a discount to the traded share price. Secondly, the Government offer tax advantages to the participant and the company, which make them more appealing. Thirdly, the employee makes a regular monthly contribution to the scheme over several years.

The arrangement is a sound one, and that is why, historically, the plans have been reasonably popular and effective. Each of the parties involved benefits. Employers gain more productive and engaged employees, the Government support businesses to perform well and encourage share ownership—a proven source of financial resilience—and employees are more aligned to the success of their employer.

The two plans I will focus on today are the share incentive plan, known as SIP, and the save-as-you-earn system, known as SAYE or Sharesave. Those are just two of the existing share ownership plans, but they are the only two that are known as all-employee share plans; that is to say, when a company offers one to its staff, it must offer one to every single employee within its company on the same terms. It is those plans that lead to participation from across the income range, and from all parts of the country. They are truly inclusive, requiring relatively modest monthly investments from participants.

However, there is a problem that has been raised with the Treasury over recent years: participation rates in the employee plans are plateauing, and in some cases falling. Rates are simply not increasing at the rate that we would hope for.

I could spend the time I have available citing the data, but I will instead point out just a few of the headline facts from the Treasury’s own data, which I am sure the Minister is familiar with. First, the number of firms in which employees were granted SAYE in 2021 was 260—a fall from 340 in 2007-08. Secondly, the number of employees granted a new SAYE option in 2020-21 was 380,000, which was a bump up from the previous two-year period of 310,000. Despite that bump, it is necessary to go back to 2011-12 to find the last time that new SAYE grant take-up was that low.

[Alex Sobel (Leeds North West) (Lab/Co-op)]

My right hon. Friend is making an excellent speech. Perhaps one reason why there has been such a long period without an increase in take-up is the way that people are employed. The nature of work is changing: more and more people are in the so-called gig economy—platform workers—where they are not on pay-as-you-earn. They therefore cannot take part in such schemes. Should the Government update the schemes so that those workers, and not just workers on PAYE, can take part in them?

[Sir George Howarth]

My hon. Friend must have read my mind. I will come on to that very point shortly.

As I was saying, the number of employees granted a new SAYE option in 2021 was 380,000, which was a bump up, but the last time take-up was that low was in 2011-12. In 2020-21, employees in 480 companies were either awarded or purchased shares, a figure that has fallen steadily over the past decade. For example, in 2011-12, there were 570 such firms. There are several reasons for that, but the problem is that SIP and SAYE, which were developed 22 and 42 years ago respectively, have barely changed in all that time and no longer reflect the modern workplace. The period that employees typically spend at a company has markedly reduced. Indeed, young people are often encouraged to move jobs more frequently to secure career advancement.

[James Cartlidge (South Suffolk) (Con)]

I have long cared about employee share ownership schemes. I recently had the privilege that the company that I set up before I became an MP awarded shares to staff that it has had for many years—the first time that the company has done so. My experience is that all such schemes are terribly complicated. Companies have to spend a lot on accountants to get them to work, especially if they are small or medium-sized enterprises. In the submissions the right hon. Gentleman received from external groups, were there any proposals to simplify the schemes? That may help to increase uptake.

[Sir George Howarth]

I am grateful to the hon. Gentleman for intervening. Simplicity is always the key to the success of any scheme, particularly in complicated financial matters. He makes a good point.

As I said, young people are encouraged to move jobs more frequently to secure career advancement. Expecting staff to make a long-term commitment to investing in share plans when they do not expect to stay at a firm for that long—the SIP, for example, requires a five-year minimum investment period to ensure maximum tax efficiency—is no longer realistic.

Employee share ownership plans operate particularly well when a significant number of employees at a company participate. Research demonstrates that where levels of participation are relatively high companies enjoy positive returns, including increased staff engagement and loyalty, enhanced financial resilience for participants and increased productivity. The fact that the Government offer tax advantages to employee share ownership plans is, of course, welcome. However, the risk, which grows greater by the year, is that without reform the plans could become increasingly obsolete.

I worry about being too prescriptive about which changes are required to stimulate an increase in interest and participation, but some relatively simple changes could be made. For example, reducing the commitment required from SIP participants from five years to three years to achieve maximum tax efficiency. ProShare, which is the body that represents the ESO sector, has proposed such a change. Its research shows that many people are put off by having to make a five-year commitment, but would be prepared to make a three-year investment. Employers say the same: more companies would offer the SIP to staff if it was three years not five. Those that offer SIPs say that participation levels would increase.

Employee share ownership has been more widely supported by diverse organisations such as the CBI, the Social Market Foundation, the TUC and the Co-operative party. The CBI states:

“The moral case for financial inclusion is a compelling one—people have a right to their dignity and financial exclusion denies them that right. But the business case also speaks for itself—with people living in the poverty zone producing five to six times lower quality work than their colleagues.”

The Social Market Foundation suggests:

“As the UK economy emerges from the Coronavirus pandemic, now is a good time for government to push for higher rates of employee share ownership. With productivity growth in the UK lagging, a shift towards ownership structures which bolster innovation, employee effort and corporate long-termism should form a key part of the economic recovery plan.”

The TUC said that it

“supports employee share ownership, subject to conditions”.

I will quote three of those conditions. First,

“shares or share revenues should be allocated free of charge and equitably to all staff to avoid share ownership reinforcing existing pay differentials and excluding the low paid (the principles expressed a preference for collective schemes)”.

Secondly,

“employee share ownership schemes are not a substitute for decent pay or collective bargaining”.

Thirdly,

“workers and their unions should be involved in the running of the scheme, which should go hand in hand with the involvement of the workforce in company decision-making”.

As we face a cost of living crisis and higher levels of inflation, we should be looking at creative solutions to support people in work. Why not free companies to support lower-income employees by allowing offers of free shares to this group only, which would relieve legitimate financial concerns?

Coming back to the point my hon. Friend the Member for Leeds North West (Alex Sobel) made earlier, why not create a one-off SAYE that lasts for just one year, instead of the current three or five years? That would enable people to make regular savings but allow them to take their savings back if they struggle to pay the bills. At the same time, it offers a potential return at the end of the year in the form of either interest or a share price increase.

There is a conversation to be had about how we can develop a new type of scheme that would allow the more than 4 million people who operate in the so-called gig economy to join a share plan and own a stake in the organisation they work for. As the Minister will know, the current plans are exclusively for those on PAYE but, as our workforce changes, we need to design new plans that do not depend on regular monthly contributions and are accessible to those in less regular forms of work. I therefore urge the Government to consider undertaking their own consultation on these plans.

As the Minister will be aware, the Treasury is already consulting about reforming two other discretionary share plans: enterprise management incentives, or EMIs, and company share options, or CSOPs. These plans are typically offered only to a relatively small group of people, usually in managerial positions. It seems the Government are looking at these plans to help increase participation and benefits to participants. “About time too,” some might say. The CSOP has not changed or been updated in any way since the 1990s but, at the very time as we are facing a cost of living crisis, the Government seem to be choosing to reform plans that are already popular and typically benefit only those on high incomes. SIP and SAYE, which benefit some of the poorest paid workers, must surely be a higher priority for reform.

I hope the Minister will address that point. It has been made repeatedly to the Treasury over recent months, so far without any satisfactory answer. There are many examples of people participating in share plans and achieving significant gains on their savings and investments. Employees of Pets at Home, mainly shop-floor staff working in retail, who participated in the company SAYE recently made an average gain of £21,000 each, which represents a healthy return on their investment and achieving the financial resilience that is going to be so necessary in the months and years ahead.

As for the SIP, the recently issued annual survey from ProShare shows that the average value of a participant’s SIP holding at the end of 2021 was £10,294, a vital financial lifeline that can be drawn on when times are tough. These stories of millions of ordinary people making regular contributions, getting into the habit of putting something aside each month, building up a nest egg to help support their families, which millions of people up and down the country have done over the last 40 years, must not be lost by becoming obsolete.

If these plans are to operate successfully in future, now is the time for the Treasury to act and to identify what is needed to ensure that they remain relevant and compelling, and to guard against them disappearing. It cannot do that alone; it must consult far and wide, speaking to experts such as ProShare and the CBI, yes, but also to people who participate, in order to understand why they do so. After all, those are the people the plans are intended to benefit, and I would like to see millions more do so.

Finally, in what I hope would be a Treasury-led consultation, I urge it to update the excellent 2007 research by Oxera, commissioned by Her Majesty’s Revenue and Customs, which demonstrates the productivity benefits of the plans. I know from my conversations with those in the industry that, when they make suggestions for the share plans reform, such as the reduction in the SIP-holding period from five to three years, they are asked to provide evidence of the impact on productivity. May I constructively suggest that the Treasury is best placed to make that assessment? I would like to know whether it intends to do so in the near future.

The Minister might not know her fate over the next 24 hours, and I wish her well. If she remains in this position, I hope she will give this matter serious consideration, or otherwise draw it to the attention of whoever succeeds her. I look forward to hearing from her.

[The Financial Secretary to the Treasury (Lucy Frazer)]

It is a pleasure to serve under your chairmanship, Sir Edward. I congratulate the right hon. Member for Knowsley (Sir George Howarth) on securing today’s important debate. I have spoken to Members across the House, and there are many supporters who know the importance of this area. I know that the issue commands cross-party support, as we can see today. I, too, want employees to share in the success of the companies they work for. I want businesses to reward and retain talent, driving even more success.

I believe that through taxation policy, including reliefs, we can drive innovation. The partnership between business, employees and Government, which the right hon. Gentleman talked about, is important. A vital part of that is the support that the Government provide to employee share ownership through tax reliefs, which were recorded at £760 million of income tax and national insurance contribution relief in the financial year ending 2021.

There are four tax-advantaged share schemes, with millions of instances of awards or share options benefiting employees every year. The right hon. Member talked about SIP and save-as-you-earn, so I will mention those first. They are designed for companies to offer a tax-advantaged option or shares to all employees on the same basis. Save-as-you-earn, which has the largest aggregate value of all the schemes, is designed to help lower earners to save, by deducting salary directly at source, and adding it to a special savings account for the scheme. At the end of their savings contract, employees can use the funds to purchase shares in their employer.

Our other all-employee scheme is the share incentive plan, which was introduced in 2000, 20 years after the introduction of SAYE. It is targeted at companies that wish to help their employees to purchase shares directly in their company, or even receive them as awards. That particularly helps low to mid-range earners.

Although the right hon. Member talked about SIP and save-as-you-earn, which rightly deserve attention of their own, there are other schemes to help companies with their growth. In turn, such schemes help the growth of the wider UK economy, so it is right that we consider the wider share schemes landscape, too. Two distinct schemes give companies choices over which employees they offer tax-advantaged options to, with specific criteria and performance conditions that can be tailored to the company. The company share option plan introduced in 1984 remains popular among many companies of all sizes, which use it to motivate and reward junior and middle management. Lastly, we have the enterprise management initiative. Unlike the other three schemes, EMI is specifically targeted at small and medium-sized enterprises, with the objective of helping them to recruit and retain key employees by rewarding them with highly tax-advantaged share options with a value of up to £250,000 per employee, which can be offered at a discount.

The schemes give companies additional ways to incentivise and reward employees for their hard work by helping them to offer committed employees a direct stake in a company. As the right hon. Member said, that helps firms to achieve a more engaged and motivated workforce by aligning employer and employee interests in the growth of businesses and motivating hard work from employees, who can benefit from their input with a tax-advantaged output, helping to make a company a more attractive place to work by offering an appealing and unique remuneration package. Further, it encourages loyalty to a company among employees, fostering an environment in which the company can increase its productivity and achieve higher and faster growth compared with companies with a less engaged workforce. Lastly, the scheme can help with wider social effects, too, by encouraging savings and investing habits. In turn, it can support better financial planning on an individual level.

The right hon. Member raised an important point about the length of the investment term. To achieve the objective of incentivising employees to stay with a company as it grows, one of the SIP scheme’s rules is that the tax advantages are available on shares awarded only once a certain period of time has elapsed. That encourages employees to commit to their employer and to put hard work into the company to ensure that it succeeds, and the tax relief enhances the reward that they can gain from maximising the company’s success. Although partial tax advantages are possible for an employee after three years, full tax advantages for SIP are enabled at the five-year mark. Unlike the other schemes, SIP enables a direct purchase of shares in the company rather than other options, and the five-year holding for the full income tax and national insurance exemption is intended to encourage employees to remain invested in their employer.

[Sir George Howarth]

Will the Minister give way?

[Lucy Frazer]

If I could just continue the point.

[Sir George Howarth]

I wanted to intervene on a point that the Minister has already made.

[Lucy Frazer]

I appreciate the points that the right hon. Member has made. Stakeholders and employees may not otherwise intend to remain with their current employer for five years, which is why the tax relief is designed to encourage a long-term commitment, but I appreciate the suggestion of a one-year SAYE and less regular contributions.

[Lucy Frazer]

I thank both my hon. Friend and the right hon. Member for Knowsley for their interventions. I was going to say that if evidence could be presented of the impact of that on people taking up the scheme, I know that the Treasury would be very interested in looking at that. As my hon. Friend said, it is important that the schemes are as simple as possible, and I would welcome any suggestions on that point.

With its current restrictions, SIP remains popular. We see people making use of the greatly beneficial tax treatment, with a total value of £780 million in shares purchased or awarded under a SIP scheme in the financial year 2020-2021. We continue to evaluate the schemes to make sure that they are incentivising the behaviours that I have outlined. We keep these important and advantageous schemes under review to make sure that they provide value for money for the taxpayer, support the wider aims of the economy and help employers to drive commercial success.

We launched a review at Budget 2020 to ensure that the EMI provides support for high-growth companies to recruit and retain the best talent so that they can scale up effectively, and to examine whether more companies should be able to access the scheme. At the spring statement, the Government concluded that the current EMI scheme remains effective and appropriately targeted. None the less, the scope of the review was expanded to consider whether the company share option plan should be reformed to support companies as they grow beyond the scope of the specifically targeted EMI. I know that these companies might want to make use of other discretionary schemes, such as the CSOP. While our inclination is to support those companies in doing so, Members will understand that we want to build the evidence base before committing resources, which is why we have expanded our review to include CSOP.

As part of the Government’s duties to evaluate tax reliefs and their value for money on an ongoing basis, we are currently reviewing the broader share scheme landscape. We will keep these important and advantageous schemes under review.

[Sir George Howarth]

I made the point that it would be better if the Treasury carried out its own consultation exercise, rather than asking organisations to bring it forward. The Minister can reflect on that subsequently—I do not want her to answer it now, but just to take it into account.

[Lucy Frazer]

As I mentioned, the Treasury keeps these schemes under review, but of course external evidence is always welcome. We want to ensure that these schemes support the wider aims of the economy and help employers to drive commercial success. We always welcome any evidence that can be brought forward.

In closing, I reiterate that these schemes have an important place in the toolbox of taxation policies. They will help us to drive productivity—the only way to sustainably raise living standards—while fuelling economic growth.

Question put and agreed to.