A share in success: making the most of employee share schemes

Ensuring everyone feels connected to the success of your company can help motivate employees and build morale. Employee share schemes can be a very tax-efficient way to do this.

The tax office is currently consulting with businesses over whether the current schemes available are working well, although the most attractive scheme for smaller businesses is not part of the current consultation.

Ifty Nazir, who founded share scheme platform Vestd, says that its recent survey showed that over one in ten founders said their share scheme had helped their companies to grow and develop. A similar percentage said their scheme helped to improve employee loyalty and helped with their recruitment efforts.

Businesses that have set up these schemes agree

Liam Keogh, co-founder of marketing company Palm, says that the share scheme he set up last year is already seeing results.

“Our guiding principle at Palm is to give our team as much autonomy as we can, as we believe that giving individuals the freedom to think for themselves and to decide the terms under which they work enables them to do the best job possible,” he says. 

“Our new employee ownership initiative is now at the heart of this.”

Amanda Sexton, who runs internet marketing agency Focus Works, says that her company’s scheme changes staff’s relationship with the business.

“Seeing the spark in someone’s eye when they realise they own a part of something truly special brings a new level of joy and satisfaction to the work we do every day,” she says.

Getting the structure right

While there are several possible employee share schemes that bring tax benefits as well as motivating staff, share scheme experts say that the EMI (Enterprise Management Incentive) scheme is usually a good choice for smaller businesses.

Amy Reynolds, Equity Reward Partner at accountancy and tax firm Mazars, says that there is a good reason for its popularity.

“The simplicity of the scheme, flexibility of structure and tax efficiencies for employees and employers are well established,” she says.

With the EMI structure, tax is incurred on the value of share options when they are awarded, not when they are exercised, and capital gains tax is levied at a lower rate if the shares are held for two years or longer.

That is good news for employees, while employers can benefit from corporation tax relief on the difference between the market value of the shares when the options are granted and when they are exercised, as well as the fact that there is no national insurance to pay on share options.

“A business can offer more attractive compensation via shares without having to spend more cash on salaries or bonuses,” explains Alex King, an accountant and founder of Generation Money.

Not all companies are eligible for the EMI scheme. You must have under 250 employees and only operate in certain sectors. For those businesses that are ineligible, Reynolds, at Mazars, suggests the Company Share Option Plan (CSOP) 

“Although not as flexible as an EMI, this can still be a tax efficient solution,” she says.

Under this scheme any employee or director can be granted £60,000 of options, and gains on these are tax free if held for three years or more.

Issues to consider

Alex King, at Generation Money, says that the cost of admin is the main pitfall of these share schemes, especially those that require extra accounting.

“Businesses looking to implement either a Save As You Earn or Share Incentive Plan must be prepared for additional accounting procedures. They must also register the plans with HMRC and comply with the relevant regulations around them including annual returns to HMRC. Late filings are punishable with fines.”

However, he adds that the administrative costs of setting up and maintaining an employee share scheme are tax deductible.

If you set one up, it is also important to educate employees on what it means for them, says online casino business founder Artem Minaev.

“Regularly soliciting feedback from your employees regarding the effectiveness of your share scheme and opportunities for improvement is crucial. Adopting an inclusive decision-making approach can significantly boost employee engagement and overall satisfaction.”

To find out more on share schemes, speak to your accountant or visit https://www.gov.uk/tax-employee-share-schemes for a full rundown of the different schemes available.

Rosie Murray-West

Rosie Murray-West is a freelance journalist covering all aspects of personal finance, as well as business, property and economics. A former correspondent, columnist and deputy editor at The Telegraph, she now writes regularly for publications including the Times, Sunday Times, Observer, Metro, Mail on Sunday, and Moneywise magazine.