Employee Share Schemes

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.

Unapproved employee share schemes are more flexible, as no HMRC approvals are involved in choosing qualifying employees or the value of shares they receive. You should be able to claim a deduction against corporation tax for an employee’s financial gain when they exercise their options. These schemes are less tax-efficient for employees than Approved options.

GROWTH SHARES

Designed to incentivise employees to help grow your company, but they only benefit if performance passes a pre-set threshold. If shares are acquired at market value, employees should not pay income tax or NIC on them, and a 10% Entrepreneur’s Relief on CGT can be available on disposal. These count as a new class of shares, requiring changes to your Articles of Association.

JOINT SHARE OPTION PLANS

Benefits for the employee are similar to Growth shares, but the shares are held in an Employee Benefit Trust and split into Growth interest and Capital interest.

Employees acquire growth interest at market value, and the shares crystallise at a time specified in the plan. Tax efficient and low risk for employees, but can be complex and expensive to set up and administer.

SHARE VALUATION

Whichever scheme you choose, it will be necessary to set a value on your shares. This is easy enough for listed companies, but as a private company, it becomes more complex, with a variety of different methods available.

One example is to compare your company with several listed companies of similar size, age, growth and market sector, taking an average of their figures across a range of key metrics. These will concern costs, capital, cash flow, earnings, debt to equity ratio and more. Expert interpretation of all these figures is essential, so we suggest you talk to us as soon as possible to work out a share valuation.