Employee Share Scheme
The retention and incentivisation of staff is key to a business’ performance and, ultimately, its growth. A great way to retain key members of staff is through an employee share scheme. Employees are more determined and productive when they know there’s the potential of equity. An employee share scheme may also be part of a succession plan, gradually passing ownership to the next intended business owners whether management or employed family members. The government want to incentivise this behaviour and so have created four tax advantaged share schemes:
- Share Incentive Plans (SIP)
- Save As You Earn (SAYE)
- Company Share Option Plans (CSOP)
- Enterprise Management Incentives (EMI)
They all have their own quirks and features and not every scheme is appropriate for every business. All of the schemes have limits on the value of shares which can be issued as well as time restrictions. Due to the restrictions they may not always fit your requirements and end goals. It is still possible to implement a scheme without those restrictions, although it will be a non-tax advantaged scheme. Being ‘non-taxed advantaged’ doesn’t mean there isn’t merit in such share schemes.
Share schemes can be implemented in two ways: either by granting shares or by granting options to acquire shares. When the aim is to motivate staff options may be better as conditions can be attached to them more easily. Once equity has been given away in shares it could be awkward to get back from an under performing employee without good/bad leaver provisions and shareholder agreements. Example conditions are:
- Time frame to exercise option within
- Performance conditions (either individual or company)
- Option exercise price
- Restrictions on the rights of the shares to be granted
The four schemes are briefly outlined below:
Share Incentive Plans (SIPS): The employer can give a maximum of £3,600 a year free shares which can be matched by the employee up to a limit of either £1,800 or 10% of their income, whichever is lower. If the shares are kept for at least 5 years the employee will not need to pay tax or NI on their value.
Save As You Earn (SAYE): Employees can put aside up to £500 a month to buy shares at the end of either a 3 or 5 year contract. The employee will not have to pay tax or NI on the difference between what they paid for the shares and what they’re worth.
Company Share Option Plan (CSOP): Options are granted to an employee which if they exercise 3 years after granting they will not pay tax or NI on the difference in value between grant and on the day they exercise the option. If exercised within 3 years the employee will pay tax and NI on the difference. There is a limit of £30,000 per employee of options granted under this scheme.
Enterprise Management Incentives (EMIs): Share options of up to £250,000 per 3 year period can be granted per employee. The employee will have to pay tax and NI on the difference between the value of the share on granting and what they paid for the option.
The tax treatment of granting shares versus options is largely the same. The company will receive a corporation tax deduction and the employee will pay income tax on the value of the shares. With options the deduction and charge occurs in the period when the option is exercised rather than when its granted. Conversely when shares are granted the deduction and charge occurs in that period.
There exists special rules where the shares or options being granted are readily convertible assets. Essentially these are options or shares which can quite easily be converted into cash and so are taxed as if they are a cash payment.
If a tax advantaged employee share scheme is being used there may be conditions on when the shares and options can be granted or exercised to receive the favourable treatment. For example, under a CSOP if the option is exercised before the third anniversary of granting then tax and NICs will be due. The employee may not be willing to wait three years for their shares and so a non-tax advantaged scheme should be used instead.
There exists little in the way of legislative restriction on non-tax advantaged schemes and so they can be tailored made to fit any business requirements. The only downside is that they do not attract any additional tax benefits.
Advantages and disadvantages of employee share schemes: