If you’re an employer you may want to consider taking advantage of switching your business model to an employee share scheme for a number of commercial or financial reasons.
Employee share schemes allow for succession planning in helping existing shareholders exit, knowing that the company’s management and ownership will be taken care of by the right candidates and can also result in more incentivised employees, consequently improving productivity amongst the workforce.
As the owner of a business looking to take advantage of an employee share scheme you have the option of adopting an approved scheme or an unapproved scheme. Approved schemes are government pre-approved, generally tax advantageous with obvious savings surrounding income tax and national insurance. Alternatively, unapproved schemes can be structured in any way the company wants with or without the guidance of a financial advisor, are discretionary in their nature, however, bare no directly approved tax savings for the company nor the employees.
Which employee share scheme is right for me and my company?
The below will consider the requirements of commonly used approved schemes and will briefly touch upon unproved schemes and how they might work.
Enterprise Management Incentives – (EMI)
This is the most popular scheme with around 85% of all schemes being used in the UK accounting for EMI’s.
The basic requirements for eligibility state that the company must not have gross assets of more than £30 million and fewer than 250 full time staff with excluded activities being accountancy and legal services. The maximum value of shares the company may grant under an EMI is £250,000 per employee.
The statutory requirements of an EMI emphasise the overriding principle of the scheme, which is ultimately to provide benefit to directors and employees. In light of the overriding principle, HMRC must be notified of the grant of EMI options within 92 days of granting them to employees and the company must clearly tell the employees of the restrictions on the shares granted to them in written format.
The value of the shares offered can be at restricted or unrestricted market value. If offered at restricted market value the shares can have restrictions placed on them and the share value can be much lower than market value. On disposal the restriction on these shares are automatically lifted.
A s.431 election should be considered by the employer and employee if the shares are acquired at restricted market value.
Available reliefs:
- Corporation tax – deductions are available when the options are exercised.
- Business asset disposal relief – applies even if any one employee doesn’t have 5% shareholding (however, the employee must have been given the option to buy them at least 2 years before selling them.
Company Share Option Plan – (CSOP)
Much like EMI’s, the overriding principle of CSOP’s is to provide benefit to the employees and directors as a whole.
The basic requirements for eligibility state that the company must be independent or listed. “Independent” meaning not controlled by another company. Unlike EMI’s, CSOP’s do not have a cap on company assets or number of full time staff for a company to utilise the scheme.
Under a CSOP, the company has full discretion in deciding who the options are grated to, as long as they are granted to employees or full time directors. Additionally, the employee or director must not have a material interest in the company, meaning they must not hold over 30% of shares as a result of the exercise. The maximum value of shares the company may grant is £30,000 per employee, dramatically lower than the £250,000 allowed via an EMI.
The value of the shares offered must be at market value.
Available reliefs:
- Income tax – if exercised after 3 years (but before 10 years) of issue and no income tax payable on grant.
- Entrepreneurs relief is rarely granted as more than 5% of the shares are rarely owned by an individual employee of a CSOP scheme.
Save As You Earn
This scheme is often used by listed companies but some larger private companies may also take advantage of it.
Money must be saved by an employee by entering into a HMRC certified savings arrangement with the company. The employee must save between £5 and £500 per month for three years.
Usually following a three year saving period (sometimes a 5 year period), the employee must exercise the option to acquire shares within 6 months of the qualifying 3 year saving period.
The value of the shares offered must be at market value.
Available reliefs:
- Corporation Tax – relief will be given in the accounting year the options are exercised.
- Income Tax – no income tax liability if options are exercised at least three years after the grant date.
- PAYE and National Insurance – does not operate on grant or exercise.
Unapproved Schemes
An unapproved scheme can be whatever the company wants it to be. Generally with the help of a tax advisor or an accountant each individual company can restructure the company in any way they wish while incorporating some of the approved scheme features.
The disadvantage in using an unapproved scheme is that there are no obvious or direct tax savings in doing so, however, an organised restructuring could potentially have an indirect effect of making a company more tax efficient.
