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Accountants & Tax Advisors
for Surrey & South London

 

Tax efficient ways to attract, motivate & retain 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, 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). In some cases they can provide tax free returns.

RJP can identify the best share scheme to suit your company’s circumstances and objectives; prepare company valuations and agree them with HMRC; 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 share option schemes 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.

A number of approved possibilities exist, but the most popular amongst SMEs are:

The Enterprise Management Incentive (EMI):
Depending on the size of your business, an Enterprise Management Incentive (EMI) 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.

The Employee Share Scheme (ESS):
This allows companies to offer a new form of employment status to new and existing employees in conjunction with a tax effective share scheme. Subject to certain criteria, the shares can be tax free when sold, offering a very attractive incentive to employees. The scheme can also be used for growth shares, enabling you to provide employee participation on future company growth only.

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.

Share schemes are a powerful incentive for staff and provide a way for companies to attract the best talent to their businesses. Set up correctly they can be a useful tax planning tool and a key part of your long term growth strategy.

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