HOW DOES IT WORK? To fully understand the attraction of an APSS, we need to first look at how the process of awarding a cash bonus plays out and why such a seemingly positive transaction can leave both employer and employee feeling somewhat underwhelmed.
Let’s take a hypothetical scenario and follow it through:
A company rewards a key employee for their efforts with a cash bonus. The company is recognising excellence and the employee is delighted because they feel their good work is being acknowledged – so far, it’s a win-win. However, the next step in the process is the calculation and deduction of the relevant taxation. For a cash bonus, that means income tax (40%), as well as Pay-Related Social Insurance (PRSI) and the Universal Social Charge (USC). By the time the payment reaches the employee, they will be netting less than half of the gross amount they were awarded. It’s still a bonus payment, but compared to what the employee was initially expecting, the final figure may come as a relative disappointment. Meanwhile, the company may feel similar frustration – seeing more than half of the award go somewhere other than originally intended. In addition, the company will be required to pay Employer PRSI on the full amount of the award. Based on the level of the award, this can see an added cost of the award of c. 11%.
APPROVED PROFIT-SHARING SCHEMES
An Approved Profit-Sharing Scheme (APSS) is a Revenue-approved employee ownership scheme that allows employees to convert cash bonuses into shares, with a view towards selling those shares for a profit after an agreed time period. With an APSS, there’s a reduced tax burden associated with the entire sequence of transactions for employer and employee alike.
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