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Employee Share Schemes - what are they, and does your business need one?

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The concept of rewarding your employees has been around for donkeys’ years in various guises, whether it be pay rises, benefits packages, bonuses or a cracking Christmas party. Setting up an employee share scheme gives employees the opportunity to buy shares in their employing company, often at a decent price, which will hopefully reap financial rewards when those shares are later sold.

Share schemes can be firm wide or just for a handful of key persons. The rules will determine when participants get their shares – either immediately, or at a future date - and may be dependent on certain targets being met by that employee. The schemes can also be structured in a tax-advantaged way (provided the company gets HMRC approval), and these types of scheme have become increasingly popular in the last few years. According to HMRC, the total number of companies running tax-advantaged schemes in the UK was 16,330, which equates to a massive 88% increase in use since 2010.

Companies may be able to reduce their tax bill (and payroll bill!), whilst still rewarding and incentivising employees, who can also save tax as these schemes are designed to ensure capital gains tax not income tax is payable when they realise any gain from selling their shares. According to HMRC, an estimated £480 million in income tax and £280 million in national insurance contributions were saved in the tax year ending in 2021 - reductions in corporation tax are also possible, depending on what scheme is used.

Initial considerations

If you are thinking about setting up a share scheme, you must be clear about what you are trying to achieve with the scheme, who it is intended to benefit, when you would like the participants to be able to get their shares/rewards and the impact on you as a business owner of losing a chunk of the company’s worth. You will also need to enlist the help of an accountant or other tax adviser to provide a valuation for the shares. This is key.

Employee share schemes are particularly useful for newer businesses that maybe can’t afford to pay high salaries in order to attract the kind of talent that they need. They can also:

  1. facilitate succession planning for a business
  2. increase retention rates of employees
  3. encourage employees to put their best foot forward at work
  4. increase job satisfaction
  5. bring better results – as the employees have ‘skin in the game’.

Schemes can be structured so that the shares will be issued only when the company is sold (an ‘exit only’ scheme), or when the employee reaches certain milestones (called ‘time and performance related’ schemes). The former scheme is cleaner and simpler, as you will not have to deal with minority shareholders at any point.

Tax advantages

Generally, the types of schemes can be split into ‘tax-advantaged share schemes’ and ‘non tax-advantaged share schemes’, the key difference being that tax-advantaged schemes have been approved by HMRC and have strict requirements that the company must meet in order to qualify (for example, maximum turnover limit for the company and, in the case of SAYEs and SIPs, participation in the scheme must be offered to all employees).

Types of tax-advantaged schemes are:

  • Enterprise management incentives (EMI) options
  • Company share option plan (CSOPs)
  • Save as you earn (SAYE)
  • Share incentive plans (SIPs).

Non tax-advantaged plans can consist of:

  • Long term incentive plans / performance share plans
  • Deferred bonus / share matching plan
  • Phantom option plans
  • Joint ownership arrangements
  • Employee benefit trusts
  • Growth shares.

Non tax-advantaged schemes are more flexible and the employer has discretion as to who participates in the scheme. Whilst they do not attract the same kind of favourable tax treatment, companies may find themselves ineligible for the tax-advantaged schemes, or may want to be more choosy about which employees they want to include in the scheme. There’s a share scheme that will suit everyone!

If saving a bit of tax, and encouraging and incentivising your employees to share your passion for growth sounds appealing, please contact either Nick, Sally or Lucy to discuss how we can best help you. We can create a bespoke solution tailored to your company’s needs.