Set up employee share schemes
Consider an employee share scheme as one way to give your employees a share in the success of your business.
An employee share scheme is one way to give employees a stake in your business and help improve its performance.
As employees normally have to remain with the business to get this benefit, share schemes encourage loyalty, helping you to retain valued staff. They act as an incentive or reward and may also help recruitment, as the attraction of shares could help you entice top talent.
This guide examines the various share-award and share-option schemes, including HMRC-approved share schemes and taxed employee share schemes. This guide will help you choose the best employee share scheme by helping you weigh up the advantages and disadvantages for employers and the advantages and disadvantages for staff. It also looks at employer duties when setting up an employee share scheme.
It's a good idea to talk to your legal or financial adviser about the tax and National Insurance implications of different employee share schemes before introducing one to your workplace.
Employee share schemes: an overview
Tailoring employee share schemes to your needs, schemes approved by HM Revenue & Customs, and employee benefit trusts.
Employee share schemes can involve giving free shares to employees, granting them options to buy shares at a specified price after a specified period of time, or allowing employees to buy shares, and sometimes matching these with free ones.
Tailor your share scheme
To tailor a share scheme to the needs and goals of your business, you can:
Rewards for meeting targets
Make the award of shares or grant of options dependent on reaching certain milestones, eg, meeting specific sales targets.
Stock market flotation
Structure the share scheme so that employees become entitled to shares only if you sell or float the company on the stock market.
Limit the share scheme
To certain key employees, eg, those with scarce managerial or technical skills.
Length of service
Require a certain number of years' service to qualify for shares - but make sure you don't discriminate, eg, it could amount to unlawful indirect sex discrimination if employees need five years' service to participate in your scheme but women in your business tend to have less service than men.
Consider different share schemes
Run a combination of share schemes or provide more favourable terms for directors, eg, an enterprise management incentive scheme for directors and a share incentive plan for other staff. Consider the rules for tax-advantaged schemes before doing so.
Other types of share schemes
Share schemes approved by HM Revenue & Customs (HMRC) can have tax and National Insurance contribution advantages. See HMRC-approved share schemes. Taxed (unapproved) share schemes do not have tax advantages, but they don't have to meet the qualifying conditions for approved schemes, meaning you have more flexibility in design. See taxed employee share schemes.
While shares in publicly traded companies can be bought and sold easily, this isn't always the case in a private company, particularly if you have no plans to float or sell the business. If you want employees to realise the value of their shares, consider establishing and funding an employee benefit trust.
The employee benefit trust can acquire shares for sale that aren't bought by anyone else, and these can then be recycled, together perhaps with newly issued shares, to meet future demand from employees.
Give some thought to how employees can see the value of their shareholding if your company is not publicly quoted. Shares in a private company can be valued in conjunction with the Shares and Assets Valuation area of HMRC.
Read HMRC guidance on .
Defining share-option and share-award schemes
Share-option schemes, share-award schemes, and share purchase schemes.
Share-option schemes
Share-option schemes are typically used as an incentive for employees.
A share option is the right to buy a certain number of shares at a fixed price, for a period of time in the future, within a company.
Employees can generally exercise their share options, ie, buy the shares, after a specified period, known as the vesting period. You can make the granting and exercising of share options dependent on reaching certain targets, such as specific sales targets.
When an employee exercises their share options, it's at the price fixed at the date of grant, ie, when the options were given to the employee, regardless of the prevailing market price. They can then keep the shares or, if the market price is higher, sell them at a profit.
Share-award schemes
Share-award schemes involve giving employees actual shares rather than share options, free or for less than their market value. The value of shares given to employees is treated as employment income, subject to tax and National Insurance contributions, unless you opt for a HMRC-approved share scheme, which comes with specific rules and requirements.
Share-purchase schemes
Share-purchase schemes allow employees to:
- buy shares
- save money to buy shares
- buy shares for a small deposit, paying the rest at a later date
When deciding to offer shares, you can choose from a variety of different types, which have different rights. See company shares and shareholders.
Employee share scheme
An employee share scheme can help a company's owners to transfer ownership to those working in the business, eg, to family or to enable a management buy-out. You can sell your company gradually and obtain tax relief while doing this. The tax relief available depends on the share scheme, eg, deferred capital gains tax on the sale of shares through an HMRC-approved share incentive plan. For further information, see .
Employee share schemes: advantages and disadvantages for employers
The effect of employee share ownership on your staff and the tax advantages for schemes approved by HM Revenue & Customs.
If you decide to set up an employee share scheme, there could be a number of benefits for your business. However, there are also some potential risks that you should be aware of before making any decisions.
Employee share schemes: advantages for employers
Benefits to employers of setting up an employee share scheme may include:
- motivating your employees to become more productive
- aligning employees' interests with those of shareholders
- recruiting new talent and/or retaining valuable employees
- compensating for lower salaries and relieving pressure on cashflow
- remunerating employees in a tax-efficient way
- increasing staff loyalty and reducing employee turnover
- raising working capital
- realising the owners' investment
Employee share schemes: disadvantages for employers
Some potential risks of having such an employee share scheme include:
Share price volatility
The effect on morale and retention if the share price falls, particularly for share option schemes.
Administration costs
Short-term costs of drawing up and getting a share scheme approved, plus long-term costs of managing the scheme and record-keeping.
Dilution of share ownership
As more shares are issued, each share you own becomes a smaller percentage of the company; you could lose control of the business. You must retain 75% of the voting shares if you want to continue taking all important company decisions.
Financial expectations
Risks of arousing unrealistic expectations among employees of financial rewards.
If employees eventually wish to sell their shares in an unlisted company (one without shares on a public stock exchange), you may need to run an internal market for the shares, perhaps through setting up an employee benefit trust.
Tax advantages for HM Revenue & Customs (HMRC)-approved schemes
Your business may be entitled to corporation tax relief on the cost of setting up an employee share plan, as well as for the cost of providing free shares and matching shares. No employers' National Insurance is due on the shares/options if the specific conditions of each share scheme are met. See .
Taxation of these schemes can become quite complicated, as can the process of getting HMRC approval, so seek expert financial advice.
For an explanation of the different types of share schemes, see HMRC-approved share schemes.
Choose the best employee share scheme
Decide on your objectives for an employee share scheme.
The first step in choosing a suitable share scheme is to decide on your business objectives for introducing such a scheme.
Why introduce a share scheme?
You might want to introduce an employee share scheme to:
- attract new talent to work for your business
- offer an incentive to retain valuable staff across the business
- provide targeted incentives to selected employees
- conserve cash and reduce the cost of pay and/or bonuses
Employees can be given shares that are held in a trust, receive share options, or purchase shares on attractive terms.
Other considerations when introducing a share scheme
When thinking about introducing a share scheme for your business, you will also need to consider:
Costs
Work out how much to spend on the share scheme plan.
Staff eligibility
Determine the details of the share scheme plan, eg, employee eligibility.
Scheme changes or closes
Decide what will happen if the share scheme needs to be wound up, or if the tax incentives change.
Regulatory requirements
Determine how the regulatory requirements attached to the share scheme affect it.
Value your shares
Work out the value of your shares and how you go about this.
Tax reporting
There are HM Revenue & Customs (HMRC) reporting requirements if you plan to operate an approved share scheme.
Choosing a suitable scheme
Whether you prefer a HMRC-approved share scheme, with the associated tax and National Insurance contribution benefits, or an unapproved taxed employee share scheme, which allows you flexibility of design
Share schemes: seek professional advice
It is worthwhile seeking expert financial advice from an accountant and/or solicitor before making a final decision on introducing an employee share scheme for your business.
Employee share schemes: advantages and disadvantages for staff
How employee share schemes affect employees outlining the positives and potential negative factors
Employee share schemes: advantages for employees
Employee share schemes enable staff to benefit from the business success they're helping to create.
Share options pose no financial risk - if the market value is less than the exercise price, employees don't have to exercise the option.
Employee share schemes: disadvantages for employees
However, there are some disadvantages for employees, such as:
Share values could drop
Staff risk losing the value of their shares if the business runs into difficulty, which increases their financial dependence on the business.
Lower salary
Staff may sometimes be expected to take a lower salary in return for receiving shares.
Qualifying period of service
Staff may have to stay with the company for a certain period to qualify for shares. This may tie employees to a job they would otherwise leave and may affect both their own morale and productivity and those of other workers.
Repaying tax on shares
Leaving before the period specified in the share plan means employees lose any options/shares and may have to repay National Insurance contributions (NICs) and income tax relief.
Tax payments on unapproved share schemes
Having to pay income tax and NICs when they acquire shares in a taxed (unapproved) share scheme, even if they haven't got enough money to do so without selling some or all of the shares. In addition, employees of private companies may not be able to sell the shares easily to raise the money.
Restrictions
Having to pay income tax and NICs each time a restriction is changed or removed if their shares are in an unapproved share scheme that carries certain restrictions.
Tax advantages for HMRC-approved share schemes
Employees participating in tax-advantaged share schemes, ie, those approved by HM Revenue & Customs (HMRC), don't pay income tax or NICs when they acquire the shares.
Under a share incentive plan, there is no Capital Gains Tax as long as the employee sells their shares as soon as they are removed from the plan, see HMRC-approved share schemes.
Dividends on plan shares may be reinvested tax-free in further plan shares.
HMRC-approved share schemes
HMRC-approved schemes appropriate for selected employees.
These HM Revenue & Customs (HMRC) approved share schemes are typically targeted at selected employees with unique or highly valued skills that are in scarce supply.
Company Share Option Plans (CSOP)
Employers can grant employees share options on up to 拢30,000 worth of shares each.
Income tax or National Insurance does not have to be paid on the difference between what was paid for the shares and what they are worth.
However, Capital Gains Tax may have to be paid if the shares are sold.
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Enterprise Management Incentives (EMI)
You can grant share options worth up to 拢250,000, and Income Tax or National Insurance on the difference between what had been paid for the shares and what they are actually worth does not have to be paid.
Capital Gains Tax may have to be paid if the shares are sold.
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Share Incentive Plans (SIPs)
There are four ways employees can get shares under SIPs:
Free shares
Employers can give staff up to 拢3,600 worth of free shares in any tax year.
Partnership shares
Each year, employees can buy a further 拢1,800 worth of partnership shares from their gross salary, or up to 10% of gross salary, whichever is less.
Matching shares
Employers can give up to two matching shares for every share the employee buys.
Dividend shares
If the employer's scheme allows it, employees may be able to buy more shares with the dividends they get from free, partnership, or matching shares.
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Save As You Earn (SAYE)
This savings-related share scheme allows employees to save up to 拢500 per month for three or five years. At the end of the savings contract (3 or 5 years), the employee can use the savings to buy shares for a fixed price. Employees get a tax-free bonus if they complete the savings plan.
The tax advantages are that the bonus and interest at the end of the scheme are tax-free. In addition, the Income Tax or National Insurance does not have to be paid on the difference between what was paid for the shares and what they are worth.
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Taxed employee share schemes
Employee share schemes where any gains are subject to tax and National Insurance contributions.
If HM Revenue & Customs (HMRC) tax-advantaged (approved) share schemes don't match your commercial objectives, there are alternative share schemes.
For taxed employee share schemes, gains are generally subject to tax payments, including Income Tax and National Insurance Contributions (NICs), deducted under the PAYE (Pay As You Earn) system.
There is greater flexibility with taxed employee share schemes. Any type of share or other financial securities can be used, and you can impose whatever conditions you want to deliver your commercial objectives.
Taxed share-option plans
This is similar to a tax-advantaged share-option plan, such as a company share option plan (CSOP) or an enterprise management incentive (EMI), see HMRC-approved share schemes. But there are no limits on the amount or value of options given. In very limited circumstances where the shares aren't readily saleable, no NICs are due.
Phantom share option plans
Phantom share option plans are cash bonus plans.
The bonus is determined by the increase in value of a specified number of shares covered by the option. It's usually the difference between the market value of the shares when the scheme matures and their value at the outset.
The bonus is subject to Income Tax and NICs. No shares are transferred or issued.
The business gets Corporation Tax relief on payments made under the plan.
Long-term incentive plans
This is a generic name for a plan that aims to provide incentives to employees over the long term, usually a year or more, via rewards linked to shares or securities.
Such plans could involve the award of shares, the grant of share options, or it could be a cash bonus scheme that tracks movements in securities. In one common type of long-term incentive plan, employees are given free shares that are held in a trust until specified conditions are met.
When employees get the shares, they're subject to Income Tax and NICs, even though they may then be held in trust for a period of time.
If employees risk losing shares because certain conditions aren't met, Income Tax and NICs may be deferred until these conditions are removed or met.
Alternatively, shares may be awarded to employees if they meet certain performance criteria.
Income Tax and NICs arise on the value of the shares when they are actually acquired by the employee.
Setting up an employee share scheme: employer duties
The guidelines and relevant legislation governing employee share ownership schemes.
What do employers need to consider with employee share schemes?
When setting up an employee share scheme, you should consider the following issues:
Rules and laws
The distribution of shares must abide by certain rules, the company constitution and relevant legislation, eg, Companies Act 2006, Financial Services and Markets Act 2000, and the listing rules of the stock market if appropriate.
Minimum number of shareholders
There must be two or more shareholders forming a company if you want to set up a share scheme.
Shares must be freely transferable
Scheme members should be able to buy and sell among each other.
Selling restrictions
Employees of private companies often have a restricted ability to sell their shares. Usually, this involves selling shares to other employees. Even in public companies, employees are sometimes given shares of a class not listed for sale on public exchanges. These are therefore likely to be more difficult to value and/or sell than the listed shares.
Subscriber's contract
Draw up a subscriber's contract when you set up a share scheme. This can be very technical, so seek expert financial advice.
HMRC-approval for your share scheme
Obtain HM Revenue & Customs' approval to operate a tax-advantaged share scheme.
Ownership system and benefits
Explain the employee share ownership system and benefits to your staff and make them aware of the risks associated with investments.
Comply with financial services regulations
Since you are operating a financial service, comply with relevant financial services regulations. This shouldn't be an issue for operating and promoting a share scheme, because the legislation contains appropriate exclusions for companies and scheme trustees and exemptions for their promotional material.
However, if you propose to run an advisory service for employees, or if your scheme has unusual features, such as shares being held by another investment entity or body, you should take professional legal advice to ensure you don't breach regulations.