Summary
- EMI, CSOP, SAYE and SIP schemes offer tax advantages when companies and employees meet the relevant conditions.
- SAYE schemes combine employee savings with share options, while SIPs provide shares directly.
- Vesting does not automatically allow an employee to exercise options, and departure terms can affect the employee’s rights.
- This guide explains employee share scheme choices and option terms for UK startups and growing businesses.
- LegalVision’s startup lawyers advise on scheme eligibility, option agreements and employee departure provisions.
Tips for Businesses
Document service or performance targets before offering options. Explain the exercise price and any requirement to wait for a company sale. Give employees worked examples of resignation and retirement outcomes. Check how the proposed option terms fit the company’s shareholder arrangements. Speak to a corporate lawyer at LegalVision about drafting option agreements with clear departure terms.
What are the tax advantages of an Enterprise Management Incentive (EMI) scheme?
The EMI scheme offers significant tax benefits for both employers and employees. If the scheme is structured correctly, employees will not pay income tax when exercising their options, provided the exercise price is at least equal to the market value of the shares at the time the options were granted. Additionally, employees may pay lower capital gains tax on the eventual sale of their shares.
Who is eligible to participate in a Save As You Earn (SAYE) option plan?
SAYE option plans are available to all employees who meet the company’s minimum service requirement. This type of scheme allows employees to save a portion of their salary in a linked savings account, and after the savings period ends, they can use the money to buy shares at a discounted rate or they can withdraw their savings.
As a startup, paying a premium for team members can be challenging if you have yet to raise plenty of capital. One solution is an employee share scheme. Using a share scheme allows you to offer your employees equity in your company. Most high-growth startups will operate an employee share scheme, as offering team members equity in the company can help bridge the gap between a startup salary and an equivalent corporate salary. Employee share schemes are also a great way to ensure your employees feel like they have a real ownership stake in the business and that their interests align with those of the business. The startup’s success will be their success.
Most employee share schemes in the UK operate by giving employees the option to acquire shares in the future rather than issuing shares directly. There are several different schemes, some of which have tax advantages. This article explores the main types of share schemes.
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Enterprise Management Incentive (EMI) Schemes
The most commonly used share scheme in the UK is the Enterprise Management Incentive (EMI) scheme.
There are several criteria that the company must meet to qualify for the EMI scheme. If you have already established overseas and are looking to set up in the UK, you will need to satisfy the following:
- UK permanent establishment – This is typically a UK company, which could be a subsidiary of an overseas company. Occasionally, an overseas company will set up a ‘permanent establishment’ ( like a branch) in the UK to meet this criteria.
- Independence test – The holding company issuing the options must not be majority-owned by another company, taking into account the shareholding of any individuals associated with the corporate shareholder. This is particularly relevant where the company issuing the options is located in a jurisdiction where trusts are used, as often the founder’s shares may be held by a corporate trustee, which would fall foul of this rule if the founder has a majority shareholding.
- Group-wide limits – You have fewer than 250 full-time employees and gross assets of less than £30 million.
In addition, the individual must satisfy tests before receiving EMI options. In particular they:
- must be a genuine employee;
- have devoted a certain number of hours to the business; and
- own (or would own after exercising their options) 30% or less of the company’s shares.
HMRC Approval
If your employee satisfies the above, they will not pay any income tax when exercising their options. This is provided the exercise price paid by the employee is at least equal to the market value at the date the option was granted. To ensure this is the case, you must obtain a valuation of the EMI shares and get this approved by HMRC. Once you have your valuation approved by HMRC, you have 90 days to issue options to employees using that valuation as the exercise price.
To issue options to your employees, you will need a set of EMI Option Plan Rules setting out how the scheme operates. Likewise, enter into an Option Agreement with the employee. Once you issue an EMI option to an employee, you will need to notify HMRC, as well as complete an annual filing.
Company Share Option Plans (CSOPs)
Companies wanting to issue options under a CSOP must meet similar criteria to EMI schemes. However, the valuation to set the exercise price does not need approval by HMRC. Accordingly, there is less certainty that the employee will not have to pay any income tax when exercising options as the exercise price has not been confirmed to be the same as the market value when granting the options.
In addition, CSOPs have less flexibility regarding when employees can exercise their options. Further, employees must hold onto them for at least three years unless certain exceptions apply (for example, they are a ‘good leaver’).
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Save as You Earn (SAYE) Option Plans
A less common form of employee share scheme is a SAYE option plan. The advantage of using this type of scheme is that the employee still gets favourable income tax treatment but can pay up to a 20% discount to the market value at the time of grant when exercising their options. However, you cannot only select key employees to issue with options. All employees with a certain length of service have the opportunity to participate in the scheme.
SAYE options work by setting up a linked savings account that the employee contributes to from their salary. At the end of the savings period, they can either use the money saved to exercise their option and buy shares or withdraw their savings.
Share Incentive Plans (SIPs)
Sips are the only incentive scheme where employees receive shares rather than options. Your startup must offer the scheme to (nearly) all employees and allow:
- employees to buy a certain amount of shares; and
- the company to gift a certain amount of shares each tax year.
Non-Tax Advantaged Share Schemes
If your company does not qualify for any of the above schemes, you are free to issue either options or shares to your employees. However, there may be income tax consequences in doing so.
Importantly, there are many hoops a startup needs to jump through to qualify for a tax-advantaged employee incentive scheme. It is best practice to seek professional advice on which schemes your startup will qualify for and how to implement the most suitable one.
“An equity offer needs to explain the employee’s route to ownership, not just the number of options. Clear departure terms matter because an employee can complete a vesting period without gaining an immediate right to buy or sell shares.”
Key Takeaways
Motivating and compensating your employees can be challenging as a startup business when you have yet to raise sufficient capital. Employee share schemes are an effective way to offer your employees equity in your company and bridge the gap between a startup salary and an equivalent corporate salary. This is especially the case when you are bringing your startup to the UK and want to motivate existing employees to make the overseas expansion with you.
There are several types of employee share schemes available, including:
- Enterprise Management Incentive schemes;
- Company Share Option Plan;
- Save as You Earn Option Plans;
- Share Incentive Plans; and
- Non-Tax Advantaged Share Schemes.
For more information on the different types of employee share schemes, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
What are the tax advantages of an Enterprise Management Incentive (EMI) scheme?
Employees generally pay no income tax when exercising qualifying EMI options if they pay at least the shares’ market value at grant and satisfy the scheme’s conditions. Employees may also qualify for capital gains tax relief when selling the shares, subject to separate requirements.
Who is eligible to participate in a Save As You Earn (SAYE) option plan?
Employees who meet the scheme’s qualifying service requirement can participate. Employers must offer SAYE participation to all eligible employees rather than select only key staff. Participants save through a linked savings arrangement and can later use the savings to buy shares or withdraw the money.
Does vesting mean an employee can exercise options immediately?
Not necessarily. The option terms determine when employees can exercise vested options. Some schemes allow exercise after vesting, while exit-only schemes generally require employees to wait until a company sale. The plan rules should also explain whether employees can exercise options after leaving employment.
Can a company offer shares without a tax-advantaged scheme?
Yes. Companies can offer employees shares or options through a non-tax-advantaged arrangement. However, employees may face income tax consequences. The company should assess the tax treatment before making an offer.
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