Share schemes - tax efficient ways to attract, motivate and retain your employees
An employee share scheme is a powerful staff motivator; it can also be highly tax efficient and has the overall effect of increasing employee productivity and consequently overall business performance. By sharing the rewards of business success with employees, it can be a cost effective way to remunerate staff and build long term loyalty. In short, an employee share scheme can encourage employees to think like business owners and become more accountable and productive.
Identifying the right type of share scheme
There are a variety of share schemes available to business owners, each with their own qualifying criteria, benefits and aspects to consider. Employee gains arising on the sale of shares acquired through approved share schemes are typically treated as capital and taxed accordingly (at a top rate of 28%, compared with the top rate of income tax which is 50%).
RJP can identify the best share scheme to suit your company’s circumstances and objectives; prepare company valuations; put the scheme in place from start to finish; complete annual compliance paperwork; and then advise you and your staff on the most tax efficient ways in which to exercise the options.
Depending on the type of scheme in operation and other conditions such as the presence of an employee trust, exercising share options need not always involve a sale of the company, therefore a share option scheme can be a strong employee motivator even when a business sale is not envisaged.
What share option schemes exist?
When considering different employee share schemes, the first question to ask yourself is who you want to reward. Is it everyone who works for you or just selected individuals?
Share schemes for selected employees
Two approved possibilities exist, both of which provide tax relief:
- Enterprise Management Incentives (EMI)
Depending on the size of your business, an Enterprise Management Incentive (EMI) scheme can be a very attractive option, particularly because of the tax benefits available and the simplicity of the rules, resulting in lower costs of implementation. It is aimed at smaller, trading businesses with gross assets of up to £30 million. If the employees participating in the EMI scheme also meet the criteria to qualify for entrepreneurs’ relief, it may be possible to further reduce their tax liability from 28% to 10% on the sale of the shares they acquire.
- Company Share Option Plan (CSOP)
Should your business not qualify for the EMI scheme, CSOP is a useful alternative. It allows UK employees to be rewarded financially for good business performance without incurring PAYE (income tax) or NI (national insurance) on their option gains.
Share schemes suitable for all your employee
The following approved employee share schemes are open to all staff and offer taxpaying employees tax relief:
Save As You Earn (SAYE or Sharesave) share options
In this scheme employees can buy shares on a regular basis from their gross salary at current market rates. When they come to exercise their options, no PAYE tax or NI is payable on any gains.
- Share Incentive Plan (SIP)
This allows employees to obtain shares in a variety of ways including purchasing shares from their gross income, receiving a free allocation of shares or participating in a matching scheme whereby the company matches any shares purchased with a free allocation.
If an approved scheme does not suit your objectives, or budget, then an unapproved scheme may provide an attractive alternative. Although unapproved schemes do not have the tax advantages of approved schemes, they can still be powerful employee motivators and can be less cumbersome and costly to administer. An unapproved scheme can also be used as a ‘top up’ scheme for certain, usually key, employees and should always be considered alongside the approved schemes outlined.
Share schemes of all types have consistently been shown to be a powerful incentive for staff and they are a way for smaller companies in particular to attract the best talent to their businesses. Provided they are set up correctly they can be a useful tax planning tool and worth considering as part of a long term growth strategy.
If you would like more information or to discuss alternative employee share schemes for your business, please contact Lesley Stalker - [email protected] or call us on 0870 22 55 220.
We provide a free initial consultation on a no obligation basis.