If you own a business, giving employees share options is a good way of attracting and retaining employees. It can also motivate workers by giving them a vested interest in the success of your organisation.
Share options are often used by start-ups and companies that are aiming to expand, where workers are putting in long hours, but businesses may not have the financial means to reward them highly through salary alone. They can also be used to attract and retain talent, and to motivate employees and align their interests with those of the business.
In the UK, there are several types of company share schemes to choose from. Employees can be given shares at specific points, for example, after a good performance review, or offered the option of buying them at a reduced price.
The main types of share incentivisation plans are:
- Enterprise management incentives (EMIs)
- Share incentive plans (SIPs)
- Save as you earn (SAYE)
- Company share option plans (CSOPs)
- Growth shares
Enterprise management incentives (EMIs)
EMIs are often used by small and medium-sized businesses with less than 250 employees and assets of less than £30 million. Employees can be given share options up to the value of £250,000 over three years.
This option has tax advantages. There is no Income Tax or NIC liability when the option is granted or exercised, except if the shares are discounted. If this is the case, Income Tax and NIC are paid on the discount. Capital Gains Tax is payable at 10% on the sale of shares, provided the employee has held them for two years.
Share incentive plans (SIPs)
A share incentive plan allows employees to buy shares up to the value of £1,500 each year. As the employer, you can choose to give them up to two more shares for each share that they purchase.
No Income Tax or NIC is payable if the shares are held in the plan for five years or more, and after this period, they can be sold without attracting Capital Gains Tax if they are kept within the plan until the date of sale. They can also be transferred to an ISA or pension.
Save as you earn (SAYE)
SAYE schemes allow employees to save up to £500 each month in a designated SAYE account. The funds are held for three or five years. After this time, the employee can buy shares in the company or take the money out tax-free. If they buy shares, they will pay the share price as of the date that their SAYE account was opened.
Capital Gains Tax is payable by the employee when they sell the shares if they have increased in price, although this can be avoided if the shares are put into an ISA within 90 days or straight into a pension. No Income Tax or NIC is payable on the difference in the amount paid for the shares and their value.
Company share option plans (CSOPs)
A CSOP gives employees the option of buying shares worth up to £60,000. The price to be paid is fixed at the outset, with the employee having the chance to buy shares at this rate at some point in the future. The hope is that they will have increased in value so that the employee will get a bargain.
If the shares are bought by the employee between three and ten years after they are offered, no Income Tax or NIC is payable on the difference in the amount paid and their value. Capital Gains Tax is paid when the shares are sold.
Growth shares
If your company is not listed, then you can consider awarding growth shares to employees. These are shares given to eligible workers if the business reaches a goal or threshold. This is a good option for organisations that cannot use other types of share option incentivisation. Growth shares are usually liable to Capital Gains Tax rather than Income Tax, which can be beneficial as it is usually a lower rate.
Schemes that do not offer tax advantages (unapproved share option schemes)
Other schemes are available that do not offer tax advantages. As an employer, you can deduct Income Tax or NIC, or the employee can submit a self-assessment tax return with details of their income and profits.
Options include acquisition schemes, where employees are given shares or offered the chance to buy them at a discounted price and share option schemes, where employees can purchase shares.
When does employee entitlement arise?
As a business owner, you can decide when and why to award employees shares or offer them the option of purchasing shares. This could be after a certain time with your business or as a reward if a certain goal is met or may be on an exit event when the business is sold to a third party.
How 3CS can help
Our expert corporate and commercial solicitors provide advice, guidance or representation in respect of a wide range of business matters. For assistance, please get in touch with your usual 3CS contact.
