Key Considerations When Using Employee Share Schemes

If you own a company that employs others, you generally want to motivate your employees to perform at their best. In addition to a competitive salary, employee share schemes are an effective way to incentivise your employees’ performance. This article helps you determine if your company should create an employee share scheme. 

Overview 

Employee share schemes (ESSs) effectively incentivise employees because they align the company’s interests with theirs. Effectively, if you give employees shares in the company, they become part-owners and can share in its profits. 

Most ESSs operate by giving employees the option to acquire shares. Furthermore, depending on the scheme, the employee may pay nothing or purchase the shares at a guaranteed minimum price. Because the employee has the option to purchase shares, these are known as “options shares”. 

There are two main types of ESS:

• tax-advantaged share schemes (TASS); and 
• non-tax-advantaged shares schemes (NTASS). 

Tax-Advantaged Schemes

The government recognises certain ESSs that limit the tax your company and its employees must pay.

There are four main types of schemes. 

Company Share Option Plans (CSOPs)

This ESS enables companies to grant option shares to their employees. Additionally, if the employee exercises their options rights, they will not have to pay income tax or any National Insurance contributions. 

Consequently, if certain conditions are met, your company can grant up to £30,000 in options (assessed at market value). 

However, to implement a CSOP, your company must be listed on a recognised stock exchange or be free from the control of another company. 

SAYE (Save As You Earn) Options Plans 

SAYE schemes allow employees to save part of their earnings and apply them to purchase shares. 

Such schemes will have two elements:

• a savings arrangement; and 
• a share option. 

To enrol, employees must enter into an HMRC-certified savings arrangement and save between £5 and £500 per month for three to five years. The savings usually come from post-tax earnings. 

Enterprise Management Incentives Options 

Commonly called EMI options, these are only available to independent companies (i.e., not owned by another company) with less than £30m assets under management and 250 employees. 

If met, there are other conditions beyond this article’s scope that enable eligible employees to exercise the option.

Share Incentive Plans 

SIPs permit eligible employees to acquire shares that are held in a particular type of trust. 

While these shares are held in the trust, usually for three to five years, they do not accrue any income or capital gains tax. 

Non-Tax-Advantaged Shares Schemes 

NTASS refer to any other scheme not recognised by the HMRC as having a favourable tax status. 

In many cases, they are CSOPs that do not meet specific eligibility criteria. For instance, long-term incentive plans and deferred bonus schemes are examples of NTASS listed companies commonly use.

There are also employee benefit trusts (EBTs) similar to SIPs but without the tax benefit. 

Key Considerations When Establishing an ESS

PAYE (Pay As You Earn)

PAYE refers to employers’ obligation with HMRC to deduct income tax and National Insurance credits from their employees’ gross income. This obligation is independent of any contract between the employer and employee.

Exit-only ESSs

The market for a private company’s shares can be small or non-existent. This can make the ESSs for private companies less attractive because the employees cannot simply sell their shares as if they held public shares. 

Therefore, many ESSs implemented for private companies operate with the caveat that employees only become shareholders after the company has been sold. You may know of this as exit-only ESSs. If the business is sold, employees may receive a portion of the proceeds from the sale. 

Understanding Shareholder Rights

If your employees exercise any option to acquire shares in your company, they will effectively be part-owners of the company. Therefore, you should be mindful that they will gain additional shareholder rights in your company. 

You can minimise this by either not issuing more than 25% of new shares to employees or by only issuing shares without voting rights. 

Other items you should consider:

• restrictions on the right of employees to transfer their shares to others; 
• any impact of an ESS on existing shareholder agreements; and
• how you will finance the new shares.

Key Takeaways 

Employee share schemes are great ways to incentivise the performance of your employees. If employees can share in the company’s profits, they will maximise their performance. There are many different types of ESSs, some of which do not impose tax obligations on the employee or company. Furthermore, you should factor in additional considerations before implementing an ESS, such as limiting certain rights employee shareholders might have, like voting. 

For more information on 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 at 0808 196 8584 or visit our membership page.

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