What are the best types of employee share schemes?

Answered by: Katie Williams, of Hazlewoods LLP

One of the best ways to motivate, engage and incentivise employees is through the use of share incentives. Giving an employee a stake in the business helps to instil loyalty for existing staff and encourages them to actively pursue the success and growth of the business. Share schemes can also an attractive proposition to potential candidates, when offered as part of their remuneration package.

There are many different types of employee share schemes and the right one will be dependent on the specific needs and circumstances of the business. One of the most common HMRC approved schemes for small and medium sized companies is Enterprise Management Incentives (EMI). EMI’s offer significant tax incentives, including generally only being taxed on disposal of the shares and at the lower capital gains tax rates, compared to income tax.

EMI’s can be offered by small independent trading UK companies to their employees, giving them the opportunity to benefit from growth in the value of the shares. There are a number of conditions to be satisfied by both the company and the employee under an EMI scheme, but they are generally quite flexible and so can be tailored to meet a business’ requirements.

There are also a number of other HMRC approved schemes such as:

Company share option plan (CSOP) – open to an independent business of any size and often use to grant tax advantaged share options worth up to £30,000 to selected key employees or directors. No income tax or NIC should be due on grant or exercise of the option but capital gains tax will be due on disposal.

Share incentive plans (SIP) – SIPs allow employees to receive up to £3,000 of free shares per year without income tax or NIC implications or capital gains tax on those shares if they are held for at least five years. There is also the option for an employee to buy up to £1,500 of “partnership shares” (capped at 10% of salary) and for an employer to issue up to two additional free “matching shares” per partnership share purchased.

Save as you earn (SAYE) – employees can save up to £500 per month under a SAYE scheme for a period of three or five years. After this time, employees receive a tax free bonus on the savings and the money can be used to exercise an option to buy shares in the company at a predetermined price.

For full flexibility, an unapproved option could be the best approach for your business, however, these will not come with the tax advantages that the approved schemes detailed above would.

If you are looking to revamp the remuneration package offered to your employees, we would recommend that professional advice is sought beforehand to confirm the tax implications of the various benefits offered for both the employer and the employee.

For more information contact Katie Williams on 01242 237661 or visit hazlewoods.co.uk.