Employee Share Schemes

Employee share schemes, which give equity to potential and existing key talent, can be very effective incentives. They need to be restricted to the people you value most (or perhaps could not otherwise afford) to avoid giving away too much equity and diluting your shares. There’s a range of different schemes, and the various tax treatments can be complex, hence the need for specialist advice before you make your decision.

Share schemes can be used for employees or if you need to tempt consultants or advisors to collaborate on your projects. Not all schemes will be suitable for both these purposes or for your company; we can talk you through the differences. Schemes can award Ordinary shares straight away or as Options to be exercised later (at a significant event or at exit). Options have qualifying criteria, so we’ll need to check that your company can offer them.

EMPLOYEE SHARE SCHEMES, INCENTIVES AND PLANS

APPROVED ALL-EMPLOYEE SCHEMES

The HMRC-approved employee share schemes are EMI, CSOP, SIPs and SAYE (described below)

COMPANY SHARE OPTION PLANS (CSOP)

These tend to be used by larger organisations that don’t qualify for the EMI scheme. They are less attractive, as options are granted at market value, the employee must hold the shares for at least three years to avoid income tax on any gains, and they are limited to £30,000 of options.

SHARE INCENTIVE PLAN (SIPs)

These include:

• Free Shares, where you can give employees up to £3,600 worth of free shares per tax year.
• Partnership Shares, which allow employees to buy an extra £1,800 of shares or the equivalent of 10% of their gross salary (whichever is less) each year.
• Matching Shares, where you can give up to two matching shares for each share the employee buys.
• Dividend shares, where employees can buy more shares using dividends from their Free, Partnership and Matching shares, if permitted by your scheme.

SAVE AS YOU EARN (SAYE)

A scheme allowing employees to save up to £500 per month for three to five years, then, on completing the plan, they receive a tax-free bonus and can use the savings to buy shares at a fixed price.

There’s no tax on the bonus or interest, and no Income Tax or NIC on any gains made on the shares.

The most popular Share Option is the EMI (Enterprise Management Incentive) scheme. It’s only available to employees spending 75% of their working time with your company. Beyond that, however, it’s reasonably flexible with attractive tax rates and you can grant an employee up to £250,000 of options.

The EMI Option Scheme is intended for independent developing companies permanently established in the UK, with gross assets of up to £30m and fewer than 250 employees. You must be substantially trading in a qualifying industry. There are some activities that companies work on that are excluded from EMIs. Excluded activities include banking, farming, property development, the provision of legal services, and shipbuilding. Employees will only pay income tax on the value of the shares when they were awarded, and the shares will be subject to a lower rate of CGT of just 10%. Subject to certain conditions, there’s also no tax or NIC cost for employers, and they can benefit from corporation tax relief on employees’ sales of shares.

Get advice on EMI schemes