Employee Share Schemes

Combining share schemes with an EOT can be effective. Immediately following the transaction, employees can purchase company shares at a low value due to the debt owed by the company to the previous owners. As the debt is paid off, the value of the shares increases over time, thus linking growth with employee incentives.

Employee share schemes enable employees to acquire shares in their company. These schemes can align employee incentives with company goals, attract new talent, and help with succession planning for existing shareholders.

When considering employee share schemes, it's important to note that if employees don’t pay the market value for the shares, the price difference could be liable for tax.

Alternatively, employees can acquire shares at market value without incurring further tax implications using post-tax income. This arrangement can work well when combined with an Employee Ownership Trust (EOT) because the company shares have little value immediately after the transaction due to the debt owed to the previous owners. This allows employees to purchase the shares at a low value, with the shares accruing value over time as the debt is repaid and the company grows, directly linking growth with employee incentives.

An approved employee share scheme is a tax-efficient way to transfer shares to employees.

These schemes approved by HMRC come with certain tax advantages, including Share Incentive Plans, Save As You Earn, Company Share Option Plans (CSOP), and Enterprise Management Incentives (EMIs).

Employee share schemes can allow employees to acquire shares outright or provide options to acquire shares in the future:

• Share Incentive Plans (SIP) and Save as You Earn (SAYE) schemes allow employees to acquire shares outright.

• Company Share Option Plans and Enterprise Management Incentive schemes allow employees to acquire share options with the right to acquire those shares at a future date at a predetermined price, typically subject to fulfilling certain performance conditions.

SIP and SAYE are more commonly adopted in larger companies, whereas Enterprise Management Incentives are popular for SMEs. If a company does not qualify for EMI schemes, CSOP can deliver similar objectives but with less attractive tax benefits.

Unapproved joint share ownership plans can also incentivise employees, essentially functioning as cash bonuses, taxed as such, but tied to the share price of the company.

EMI, SIP and SAYE schemes are available to all employees; however, EMI and CSOP schemes can be tailored and used to incentivise and attract key individuals.

If shares in Share Incentive Plans are held for more than 5 years, they are not subject to income tax or National Insurance Contributions. If shares remain within the plan, there is no capital gains tax on their disposal after 5 years.

An employee can receive up to £3,600 of free shares in a year from their employers. Partnership shares can be purchased by employees using gross salary, up to £1,800 or 10% of income, if lower.

SAYE enables employees to save up to £500 per month as part of a three- or five-year savings contract, with the savings used to acquire shares at the end of the contract. Interest and bonuses can be paid tax-free, and the difference between the cost of the shares and their market value does not attract income tax or National Insurance liability. However, shares that are subsequently sold could attract capital gains tax.

Company Share Option Plans (CSOP) provide an option to acquire up to £30,000 of shares at a predetermined price. The difference between the cost of the shares and their market value does not attract income tax or National Insurance liability.

Companies with assets of £30 million or less qualify for Enterprise Management Incentive (EMI) schemes, and individuals are restricted to a maximum of £250,000 in share options over a 3-year period. The shares do not attract income tax or National Insurance contributions if they are acquired at market value when the option is first granted. Capital gains tax may be payable when the shares are sold.Companies involved in banking, farming, property development, shipbuilding, and legal services are excluded from issuing EMI options.