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Employee share schemes: What are they and what are the benefits?

30th May 2024

Employee share schemes are a powerful tool for awarding equity to your employees, offering a strategic way to incentivise and retain key staff crucial to your business’s success. These schemes not only motivate employees but also help engage the next generation of business leaders at a higher level within your company. In this article, Emily Smith, an assistant manager in our Corporate Tax team, shares more about the benefits of employee share schemes

What are employee share schemes?

Employee share schemes allow employees to acquire shares or options to buy shares in the company they work for. These schemes are designed to align the interests of employees with those of the business, fostering a sense of ownership and incentivising performance. By offering equity, companies can attract, retain, and motivate key talent, contributing to long-term business success.

Employee share schemes come in various forms, each with unique benefits and conditions. Options include:

• Enterprise Management Incentive (EMI) schemes
  EMI schemes are the most tax-efficient method of awarding equity to employees. Designed for small to medium-sized businesses with less than £30 million in gross assets, EMI options are issued in the form of ‘options.’ This means employees only acquire the shares when certain conditions are met, such as achieving performance targets or upon the sale of the company. EMI options are highly beneficial, offering no Income Tax if the shares are awarded at market value and a potentially reduced rate of Capital Gains Tax when the shares are sold.
• Growth shares
  Growth shares are another popular method to grant employees equity. These shares are issued with a “hurdle price,” ensuring the recipient benefits from the company’s growth above a set value. The hurdle price is determined by you, and is designed to be commercially advantageous.

There are also a number of other schemes that are generally for listed companies, including Save as You Earn (SAYE) and Share incentive Plans (SIP).

The benefits of employee share schemes

Employee share schemes offer a number of benefits, including:

• Flexibility – employee share schemes provide flexibility, allowing you to reward one or more key individuals or all your employees, based on your specific goals. These schemes come in various forms, both tax-advantaged and non-tax-advantaged, suitable for companies of different sizes and structures.
• Alignment of interests – by owning a stake in the company, employees’ interests are closely aligned with those of the business owners, encouraging them to work towards common goals.
• Retention and motivation – share schemes can significantly enhance employee loyalty and motivation by providing a tangible financial stake in the company’s success.
• Attracting talent – offering equity can be a compelling incentive for top talent to join and stay with your company.
• Tax advantages – many share schemes offer tax benefits for both the employer and the employee, making them a cost-effective component of compensation packages.

Employee share schemes can be tailored to fit the specific needs and goals of your business, whether you want to reward a select group of key personnel or extend the benefits to your entire workforce.

Compliance and support

Awarding any shares or options to employees necessitates an Employment Related Securities (ERS) return to be submitted to HMRC by 5 July each year.

How We Can Help

We can guide you through selecting the most suitable employee share scheme for your business, facilitating its setup, coordinating with legal advisors, and effectively communicating the impact to your team. We can also assist you with your 2023/24 ERS return and ensure compliance.

For personalised advice on tax-efficient methods to incentivise your employees, please speak to a member of our Tax Team. We’re here to help you maximize the potential of employee share schemes for the benefit of your business and your team.