Terminology

Company - a business whose ownership is divided into parts called "shares".

Shares - ownership rights in a company.

Share option - the right to buy shares in the future at a price fixed now. If the share price goes up, you can choose to buy them but, if the price goes down, you can sit tight. Options are normally granted for free.

Shareholder - someone with shares in a company. A shareholder takes on risk because share prices can go up or down. Shareholders can have voting rights and receive dividends if they are paid. Shareholders can sell their shares to buyers to cash out.

Directors - people appointed by shareholders to run the company for them.

Dividends - profits of the company paid out to shareholders if the directors propose a dividend and shareholders approve it.

Option holder - someone owning a share option. Until the option holder decides whether to buy the shares (exercising the option) and becomes a shareholder, the shares cannot be sold. The person may choose to retain the shares after purchase, holding them for future prospects and receive dividends if these are paid.

Plan types

Approved plans - plans with tax breaks under Government laws and approved by HM Revenue & Customs.

Unapproved plans or Non-approved plans - plans not approved by HM Revenue & Customs and generally with no tax breaks. However, some unapproved plans can be structured to obtain similar tax benefits to approved plans.

Enterprise Management Incentive or EMI - an extremely flexible, tax-effective and discretionary share option plan for smaller companies.

Company Share Option Plan or CSOP - a tax-effective discretionary share option plan for companies.

Share Incentive Plan or SIP - a tax-effective "all-employee" share plan with the facility for employees to (a) buy shares from salary without PAYE being deducted (b) receive "matching" shares and (c) be given "free" shares. Any dividends paid on the shares can be paid out in cash or re-invested into "dividend" shares. Shares purchased from salary also provide potential NIC savings for the company and employees. Shares are free of CGT in a SIP.

Sharesave, SAYE or Savings-related Share Option Scheme - a tax-effective "all-employee" share option scheme used by large companies.

Employee Benefit Trust or EBT - a discretionary trust commonly is used to buy and hold shares for employee share plans; also prominent in succession planning.

Tax terms

HMR&C -HM Revenue & Customs.

CGT - capital gains tax, normally payable at 18 per cent on taxable gains. A 10 per cent rate can apply if Entrepreneurs' Relief applies.

PAYE or Pay As You Earn - income tax and NIC deducted from an employee's salary.

NIC - National Insurance contributions payable by employers and employees.

Self Assessment - income and gains reported to HMR&C and taxed after the end of the tax year.

Tax year - 6th April to 5th April.