Employee share schemes

Employee share schemes can help you recruit, retain, and incentivise employees by giving them a direct financial interest in the success of your company.

Shares can be given as a reward for achieving performance goals such as a target increase in sales or the completion of key projects on time and in budget.

Employee share schemes are particularly beneficial if you are preparing your business for sale, restructuring your business or transitioning to a new leadership team. Keeping your key team members in place will help smooth the process and retain value in the business.

Employee share options relieve the pressure on cash flow and reward employees in a tax efficient way. A share option is the right to buy a set of shares at a fixed price during a set period of time. Rules are put in place to govern when the option holders can exercise it and become shareholders.

WMT can help you choose the share option scheme that offers the most tax benefits to the business and its employees.

Enterprise Management Incentive (EMI) scheme

While there are several types of employee share schemes, an EMI scheme often proves to be the best option, as it’s approved by HMRC and offers good tax breaks.

To be eligible for an EMI scheme, a company has to have gross assets of less than £30m, less than 250 employees, and meet certain ‘trading activities’ tests.

Benefits and features of an EMI scheme

• Costs of setting up and administering an EMI are deductible expenses for capital gains tax (CGT) purposes;
• The company receives tax relief at the point of exercise for the difference between the market value of the shares at this point and the exercise price;
• No income tax or national insurance contributions (NICs) are payable when EMI options are granted, provided the exercise price of the option is greater or equal to fair market value;
• The gain made on shares is subject to CGT, ranging from only 10% (when Entrepreneurs’ Relief is applicable) to 20% for a higher rate tax payer.
• The company has total flexibility to select which employees enter the scheme;
• Options can be issued at less than market value, but PAYE and NICs will be due if the employee does not pay market price for shares;
• The company can set restrictions over the shares e.g. the shares may be non-voting.
• There is no minimum period for how long the options must be held before exercise. They must be exercised within 10 years.

If your business doesn’t qualify for an EMI scheme, we can advise you on the following options which may offer similar benefits:

SAYE – Savings Related Share Option Scheme

SAYE is an all-employee share option scheme approved by HMRC. Employees save a monthly amount of up to £500 for three or five years, which they can then use to buy shares or have their contributions returned. The gains made are not subject to income tax or NICs. CGT may be payable on the disposal of the shares.

Company share option plan (CSOP)

A company share option plan (CSOP) enables companies to grant share options to selected executive directors or employees. Each individual can hold options on shares worth up to £30,000 at the time the option is granted. The options must be exercised between the third and tenth anniversaries of the date of grant.

A CSOP is usually operated on an individual basis, but it can be operated on an all-employee basis. When making the grant, you can specify performance targets that must be met before the options can be exercised.

They are an attractive benefit because the options are free from income tax and NICs when they are granted. This is as long as the amount paid for the grant of the options and the exercise price payable for the shares, is not less than the market value of those shares when the option is approved. Capital gains tax will be charged on any gain made on the sale of the shares.

Unapproved schemes

Unapproved options have a less favourable tax status, but are very flexible and easy to administer.

The value of the scheme needs to be included in the company’s accounts. To find out more, please see our FAQ on share scheme valuations.

How WMT can help

WMT can help you make the most of your share option scheme by:

• Advising which type of scheme is best for your business and your employees
• Setting up the scheme so that it maximises the available tax benefits and is easy to administer;
• Ensuring it complies with HMRC regulations;
• Preparing your share scheme valuation;
• Advising on the impact of the share option scheme on your profit and loss account and balance sheet.

Get in touch to find out more about how we can help you incentivise your employees in the most tax-efficient way.