In competitive sectors, such as technology, employee share schemes are an increasingly popular way of rewarding and retaining staff. They’re tax-efficient and offer a great deal of flexibility.
From alphabet shares to enterprise management initiatives (EMIs), here’s a rundown of your options to get you started.
Attracting & retaining talent
In the right business, employee share schemes work well for employees and employers. Famously, the John Lewis Partnership operates under this model with its employee ownership trust.
One of the reasons for its success is that by owning shares, employees tend to feel more connected to the business.
With a greater sense of responsibility, your employees feel more motivated and work hard to achieve stellar results.
This relationship cultivates loyalty and trust. It is a good way to encourage talented employees to stick with the business for the long-term.
For smaller businesses, offering employees shares as part of their remuneration package is a way to compete with the salaries of larger organisations with deeper pockets.
That’s where a share scheme comes in handy. By offering employees equity in the business, you’re giving your employees more than just a salary.
There’s no National Insurance contributions (NICs) or income tax due on the value of shares offered under certain schemes. So, an employee’s take-home pay could rival a larger salary that doesn’t include a share package.
Bear in mind, though, that shareholders may be subject to capital gains tax. This might be payable on gains, although, this could be as low as 10%. In comparison to the income tax on a bonus given to a higher-rate taxpayer on payroll, share schemes could make great sense.
As for the employer, you may qualify for corporation tax relief on the cost of setting up the scheme. Once it’s in place, there are no employers’ NICs to pay on shares, so long as the requirements of the scheme are met.
The big four schemes
There are four share schemes that are formally approved by HMRC, and you’ll have to apply to HMRC to set them up. These are:
- share incentive plans (SIPs)
- save-as-you-earn (SAYE)
- company share option plans (CSOPs)
SIPs and SAYE schemes tend to be more appropriate for larger companies, as all employees must be eligible to participate. EMIs are popular with startups and SMEs, because they’re particularly tax-efficient and they’re cost-effective for the employer to set up.
But you can also put in place a ‘non-approved’ scheme perfectly legally. You’ll need to make sure your articles of association are drafted in such a way as to allow the scheme, but you won’t need to make a formal application to HMRC.
For that reason, non-approved schemes can be quicker and more flexible to set up. For example, you can give employees equity in the business by giving them alphabet shares, such as shares with different classes (A, B or C etc).
Alphabet shares give you the flexibility to pay dividends that are not proportionate to the shareholdings of the individuals.
You can declare dividends at different rates for different shares (so long as your articles of association allow for this). You can even use a different letter of the alphabet for each employee if you need the maximum level of flexibility.
Whether or not you give employees voting rights with their shares is up to you.
Typically, employee shares come with non-voting rights. That way employees benefit from dividends but don’t have a say in the management of the business.
How we can help
For all the benefits that employment share schemes bring, they can be complicated to get right. If you would like to speak to a member of our team please contact us and we can discuss which scheme might work best for you and offer help setting it up.