Employee share schemes

Everything You Need To Know About Employee Share Schemes

An Employee Shareholding Scheme (ESS) allows employees to own shares in the company they work for. This initiative not only aligns employee and shareholder interests but also fosters a strong sense of ownership and investment in the company’s success. Employee Share Schemes are beneficial for companies of all sizes, especially those looking to motivate and retain key talent.

Comprehensive Benefits of ESS

Financial Benefits

  • Tax Relief: In the tax year ending 2023, employees benefitted from approximately £1.08 billion in income tax and National Insurance contribution relief through tax-advantaged ESS. Among these, the Enterprise Management Incentives (EMI) scheme was the largest contributor. The Employee share schemes tax relief is a major attraction for both employees and employers.
  • Increased Earnings Potential: Additionally, Employee Share Schemes can lead to substantial financial gains. For instance, under the EMI scheme, employees can receive options worth up to £250,000. This opportunity comes with significant Employee share schemes tax relief upon exercise, enhancing overall earnings potential.

Psychological and Productivity Benefits

  • Enhanced Motivation and Engagement: Employees who own shares in their company show increased motivation and engagement. This heightened motivation drives higher productivity and improved performance. Conversely, disengaged employees lead to lower productivity and higher turnover, which can significantly cost the company.
  • Stronger Commitment and Loyalty: Employees with a stake in the company’s success are more likely to demonstrate loyalty and commitment. This, in turn, reduces turnover rates and leads to a more stable workforce. Consequently, companies experience fewer recruitment and training costs.

Company-Wide Benefits

  • Improved Company Performance: Furthermore, companies with effective ESS tend to outperform those without such schemes. The alignment of employee and company goals fosters a collaborative and results-oriented culture.
  • Increased Shareholder Value: Additionally, firms with employee share schemes often see an increase in shareholder value due to the enhanced performance and engagement of their workforce. This can lead to better overall financial health for the company.

Real-World Example:

Consider a small tech startup offering EMI options to its employees. As the company grows, the share value increases significantly. Employees who joined early on can exercise their options at a lower price, thus realising substantial financial gains. This financial benefit, coupled with the psychological boost of ownership, drives employees to contribute more effectively to the company’s success.

Understanding Shares and Options

Employee Shareholding Schemes (ESS) allow employees to own a part of the company they work for, aligning their interests with the company’s performance. These schemes can take the form of direct share ownership or share options, each offering distinct advantages.

Direct Share Ownership vs. Share Options:

Direct Share Ownership

Employees receive shares outright, giving them immediate ownership. Consequently, this provides them with instant benefits.

  • Tax Implications: In certain schemes like Share Incentive Plans (SIPs), there is no tax on the award of shares if held for a specified period. However, Capital Gains Tax (CGT) applies on sale, typically at a rate of 10-20%. This allows employees to benefit from significant tax relief.
  • Vesting Periods: Typically, shares in schemes like SIPs must be held for five years to maximise tax benefits. Early withdrawal may lead to income tax and National Insurance contributions. Therefore, employees should be aware of the holding requirements.
  • Benefits: Direct share ownership offers immediate dividends and voting rights, allowing employees to feel an instant part of the company’s success.

Example: An employee receives £3,600 worth of shares under a SIP. After five years, if the share value has increased to £6,000, they can sell the shares, paying CGT on the gain (£2,400). This demonstrates the potential financial rewards of holding shares long-term.

Share Options

Employees receive the right to buy shares at a future date for a predetermined price. This can be particularly advantageous if the company’s value increases.

  • Tax Implications: No tax is due on grant. However, income tax and possibly National Insurance are due on exercise if the purchase price is below market value. CGT is due on sale, which can impact the overall tax burden.
  • Vesting Periods: Options generally have a vesting period before they can be exercised. For example, under an EMI scheme, options must be held for at least two years to benefit from the lower CGT rate. Thus, employees need to plan their exercises accordingly.
  • Benefits: Flexibility to buy shares later at a fixed price can be beneficial if the company’s value increases significantly.

Example: An employee is granted EMI options to buy 1,000 shares at £10 each. After three years, if the market price is £20, the employee can exercise the options, buying shares worth £20,000 for £10,000. They can then potentially sell them, paying CGT on the gain (£10,000). This highlights the potential for substantial gains through share options.

Key Comparisons:

  • Ownership Timing: Shares provide immediate ownership; options delay ownership until exercised. This distinction can influence the choice of scheme depending on employee preferences and company policies.
  • Immediate Benefits: Shares offer dividends and voting rights immediately; options do not until exercised. Hence, shares might be preferred by those seeking immediate benefits.
  • Risk and Reward: Shares carry immediate market risk; options allow employees to wait and buy only if the price is favourable. This flexibility can be advantageous in volatile markets.

Financial Implications of Setting Up and Managing Share Schemes

  • Initial Setup Costs: Setting up an employee share scheme involves several upfront costs:
  • Legal Fees: Drafting and registering scheme documents, obtaining shareholder approval, and securing tax clearance from HMRC can be significant. Professional fees for setting up an EMI scheme might range from £1,000 to £3,000. Therefore, budgeting for these costs is crucial.
  • Administrative Setup: This includes creating the share option pool, setting up employee communications, and integrating the scheme into the company’s existing structure. Initial administrative efforts can impact the overall setup costs.

Ongoing Management Costs

  • Annual Administration: Costs for managing the scheme, including record-keeping, issuing shares, and handling employee queries, can range from £1,000 to £5,000 per year. These costs vary depending on the complexity and number of participants.
  • Compliance and Reporting: Regular filings with HMRC and ongoing compliance checks are necessary to ensure the scheme meets all legal requirements. This can involve additional costs and administrative burdens.
  • Software and Digital Platforms: Modern digital platforms like Vestd can streamline management and reduce costs compared to traditional methods. These platforms typically charge a subscription fee, which can be more cost-effective over time. Adopting digital solutions can simplify the management process significantly.

Comparing Traditional vs. Modern Approaches:

  • Traditional Approaches: Traditionally, significant manual effort and higher costs due to legal and administrative overheads are involved. This can make traditional methods more cumbersome and expensive.
  • Modern Digital Platforms: In contrast, modern digital platforms offer automated solutions, reducing administrative burden and costs. Platforms like Vestd simplify the setup and management process, often providing bundled legal and compliance services at a lower cost. Transitioning to these platforms can offer long-term savings and efficiency.

Worked Example: Consider a tech startup setting up an EMI scheme. Initial costs might include £2,000 in legal fees and £1,500 in administrative setup costs. Annual management costs could be £3,000. Switching to a digital platform might reduce annual costs to £2,000, thus saving £1,000 each year. This illustrates the financial benefits of modernising the management approach.

Exploring a Variety of Share Schemes for Employees

Employee share schemes are diverse and go beyond the commonly known Enterprise Management Incentives (EMI) and unapproved options. They are designed to align employees’ interests with company performance, providing various incentives and benefits.

Types of ESS

  • Share Incentive Plans (SIPs):

Characteristics:

Employees receive shares directly rather than options. These plans must be offered to all employees, allowing them to buy shares at a favourable rate or receive them for free. This ensures broad participation.

Benefits:

SIPs offer immediate share ownership, potential tax advantages, and dividends. Employees can enjoy the benefits of ownership without upfront costs.

Example:

An employee can receive up to £3,600 worth of free shares annually. If the shares increase in value, the employee benefits directly from this growth, highlighting the potential for immediate rewards.

  • Save As You Earn (SAYE):

Characteristics:

Employees save a fixed amount monthly from their salary, which is used to buy shares at the end of the saving period (3 or 5 years) at a discounted price. This scheme encourages regular saving.

Benefits:

Employees can buy shares at a discount, often up to 20%, with tax advantages if the shares are held for a specific period. This makes it a financially advantageous option for employees.

Example:

An employee saves £100 monthly for three years. At the end of the period, they use the savings to buy shares at a pre-set lower price, benefiting from any increase in share value over that period. This demonstrates the potential for financial gains through disciplined saving.

  • Growth Shares:

Characteristics:

These shares are issued at a hurdle price, reflecting the company’s value at the time of issue. Employees benefit only from the growth in value beyond this point. This scheme aligns rewards with future performance.

Benefits:

Growth shares align employees’ rewards with the company’s future performance, fostering long-term commitment and aligning interests.

Example:

If a company is valued at £1 million and issues growth shares at this value, employees benefit only if the company’s value exceeds £1 million. This can drive long-term motivation and performance.

  • Phantom Share Schemes:

Characteristics:

These are cash bonuses linked to the company’s share price, rather than actual shares. Employees receive cash bonuses reflecting share price changes without diluting ownership.

Benefits:

Provides employees with the benefits of share price growth without diluting ownership, making it a flexible incentive option.

Example:

An employee receives a cash bonus equivalent to the value of 1,000 shares if the share price increases from £10 to £15. They receive £5,000, reflecting the share price appreciation without owning actual shares.

  • Company Share Option Plans (CSOPs):

Characteristics:

Employees receive the option to buy shares at a future date for a pre-determined price. Additionally, tax-advantaged schemes are available and must be offered to selected employees. This approach not only offers flexibility but also provides potential tax benefits.

Benefits:

Importantly, employees pay no income tax on the difference between the exercise price and the market value if they hold the shares for three years. Consequently, this results in significant tax advantages.

Example:

An employee receives options to buy shares at £10 each. If the market price rises to £15 after three years, the employee pays no income tax on the £5 gain per share. This clearly illustrates the tax benefits of holding options long-term.

Professional Employee Share Scheme Advisors

Unlock the benefits of our Employee share scheme services UK for your workforce. Whether through direct shares or options, these schemes can drive engagement, productivity, and long-term growth. At Apex Accountants, our team of Employee share scheme advisors ensures you maximise financial and motivational benefits while staying compliant with Employment Law UK. Contact us to explore how we can assist with your employee share schemes and ensure compliance with our comprehensive employee share scheme services UK.

Interested In Exploring Tax Advantages Further?

Frequently Ask Questions

We offer a range of employee share schemes including Enterprise Management Incentives (EMI), Company Share Option Plans (CSOP), Share Incentive Plans (SIP), and Save As You Earn (SAYE) schemes. We also provide guidance on non-approved schemes like Growth Shares, Restricted Stock Units (RSUs), and Employee-Owned Trusts (EOTs).

EMI schemes offer significant tax advantages. Employees do not pay income tax or National Insurance Contributions (NICs) on the grant or exercise of options if granted at market value. Capital Gains Tax (CGT) is reduced to 10% if shares are held for over two years.

CSOPs are generally more flexible and can be used by larger companies. Unlike EMI, CSOP options must be held for at least three years to qualify for tax benefits. Both schemes provide no income tax or NICs on the grant or exercise of options, but CSOPs have a lower individual limit of £60,000 compared to EMI’s £250,000.

SIPs allow employees to receive shares directly. The main tax benefit is that no income tax or NICs are payable if shares are held for at least five years. Additionally, no CGT is due on disposal if shares are sold directly from the SIP.

In the SAYE scheme, employees save a fixed amount monthly for three or five years, then use these savings to buy shares at a discounted price. No income tax or NICs are due on the discount, and CGT is only payable on gains when shares are sold.

EMI schemes are designed for SMEs with fewer than 250 employees and gross assets not exceeding £30 million. Employees must work at least 25 hours per week or 75% of their working time and hold less than 30% of the company's shares.

Growth Shares are a type of non-approved scheme where shares are issued at a hurdle price and gain value only if the company's value exceeds this threshold. This aligns employee incentives with the company’s performance.

Each scheme has specific compliance requirements. EMI schemes require registration and annual reporting to HMRC. SIPs and SAYE schemes also require annual reporting and detailed record-keeping. Non-approved schemes like Growth Shares and RSUs involve internal compliance and reporting taxable benefits.

Employees must report benefits from share schemes on their Self-Assessment tax return. EMI and CSOP benefits are usually reported under capital gains, while SIP withdrawals and SAYE gains are reported under income or capital gains, depending on the holding period.

Employee share schemes help attract and retain top talent, align employee interests with company performance, enhance employee engagement, and offer tax-efficient rewards. They are crucial for fostering a motivated and committed workforce.

Insights & Articles

Client Testimonials/Reviews

Book a Free Consultation