Incentivising employees by giving them a slice of the action

01 February 2024 - Samantha Stent

Over the past couple of years, wages have kept pace with inflation, but official figures from the Office for National Statistics show that pay rises are slowing down and the jobs market is starting to weaken. Experts say that high interest rates will see wage growth slow even further next year.

It is not surprising then that many small businesses are looking at other ways to incentivise their employees, with share schemes becoming an increasingly popular option, especially for cash-strapped start-ups.

Giving staff a stake in the business can assist with the retention of key personnel, increase productivity, and improve cashflow but there are many different share schemes – which one do you choose?

The share scheme that is right for your business will depend on the size of your company, whether you want to give shares now (or options to buy shares in the future) and what you are hoping to achieve from the scheme.  It will also depend on whether you are looking to incentivise all of your employees, just some of them or whether you want to give a stake in the business to someone external to the organisation (e.g. “sweat equity”).

Firstly, let us look at the 4 share schemes that are approved by HMRC:

  Enterprise Management Incentive (EMI) Scheme Company Share Option Plan (CSOP) Save As You Earn (SAYE) Share Incentive Plan (SIP)
Overview Option permits employee to buy up to £250,000 worth of shares at a later date at a set price. Gains between option grant and exercise date are subject to CGT rather than income tax and NICs. Permits selected employees to buy up to £60,000 of shares at a later date but at the current price. Any increase in value at the date the option is exercised is subject to CGT rather than income tax and NICs. Employee makes regular monthly contributions from net pay to the scheme which are held for a minimum of three years. Employee then has the option to buy shares at up to 20% discount on market value. Employee obtains tax and NIC relief when buying shares in employer’s company (‘partnership shares’). The company may also offer free, ‘matching’ shares, which are not subject to income tax.  Shares are normally held in trust until retention periods have elapsed.
What types of companies is the scheme suitable for? Independent companies with gross assets of £30m or less, less than 250 employees and with a ‘qualifying’ trade. The issuing company must not be under the control of another company (unless it is listed on a recognised stock exchange).  No limits on company size or number of employees so can be used by larger companies and those whose trade excludes them from EMI schemes. While an unlisted company is not precluded from operating a SAYE scheme, in practice such schemes are quite complex and mainly tend to be offered by listed companies. Due to the need to set up and administer a separate trust and the complexity of the arrangements, SIPs are predominantly used by large, publicly quoted companies.
Employee requirements Can be offered to any full-time employee (unless they already have a material interest in the company). Can be offered to any employee or full-time working director (unless they already have a material interest in the company). Has to be made available to ALL employees (Under 5 years’ service can be excluded). Has to be made available to ALL employees (Under 18 months service can be excluded).
Minimum share retention period None. Three years. Minimum three years before option to purchase vests, but employer can stipulate longer period. Five years retention for full tax advantages, (limited benefits if held between three and five years).
Amount of shares that employee can purchase Up to £250,000 Up to £60,000 Monthly saving permitted between £10 and £500 Minimum £10 and maximum is the lower of £1,800 p/a or 10% salary
Tax and NIC treatment where scheme conditions are met No tax relief on purchase.Income tax is payable if there is any discount on market value at option date, but otherwise, increase in value between grant and exercise date is not taxable on exercise. On sale, CGT is due on proceeds less price paid. Business Asset Disposal Relief may be available. No tax relief on purchase. When option is exercised, the increase in value is not subject to income tax or NICs. On sale, CGT is due on proceeds less price paid. No tax relief on purchase. No tax or NIC due when shares are acquired. Any discount given on share purchase (up to 20%) is tax free. On sale, CGT is due on proceeds less price paid. Tax relief given when purchasing partnership shares. No tax or NICs due if shares held in trust for 5 years. No CGT on sale.

EMIs and CSOPs will almost always be the top choices for companies that qualify but for those that don’t (or where the £250,000 or £60,000 limits are not sufficient), unapproved option arrangements (or other non-advantaged schemes) might be considered.

Non-advantaged schemes can be quicker to set up, easier to administer and have other benefits. Unapproved share option schemes for example are particularly flexible:

Can be used to reward external advisers and consultants as well as employees. No minimum or maximum period during which options must be exercised. Company can set any exercise price it wishes;

  • Can also impose restrictions or targets in relation to the shares that align with its plans for future growth of the business.

The downside is that there is no tax advantage to be gained, with PAYE being applied to the difference between the market value of the shares and the price paid by the individual to acquire them (in the same way as if they had received the equivalent amount of salary).

Other unapproved share arrangements, such as growth shares, have a less punitive tax treatment. This simple arrangement involves setting up a new class of shares and is often used by private companies for employees who have been recruited at a later date to ensure that those individuals only share in the future growth of the business and do not benefit from their predecessor’s efforts.

Any income tax or NIC charge will be based on the value of the growth shares at the time the employee acquires them and typically, advisers will argue that these shares have little or no value at that point in time when there has not yet been any growth….. although HMRC sometimes has other ideas!

Finally, if you wish your trading business to be fully employee-owned, Employee Ownership Trusts (EOTs) are also worth considering.  EOTs have become increasingly popular in recent years and come with various incentives for shareholders and the ability to pay tax-free bonuses of up to £3,600 a year to employees.

Contact Sam Stent or the Tax Advisory Team at Scrutton Bland by calling 0330 058 6559 or emailing if you are considering implementing a share scheme as we can help you find the one that best meets your needs.

We can also assist with Employment Related Securities (ERS) scheme registrations and annual compliance and can advise on the more complex tax obligations that arise for globally mobile share scheme members.



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