Chris Downing, Director of Inspire, the business and tax advisers, answers your questions on employee share schemes.

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What is an employee share scheme?

Whether you’re looking at options for rewarding your team, bringing new talent into the business, increasing engagement or thinking about succession planning – offering an employee share scheme is a way of giving equity in your business to key individuals, or all of your team.

There’s a lot of different share schemes out there (each with their own pros and cons), so it’s important to choose the most suitable one for your needs.

What are the benefits?

Retention of motivated employees is important for any business, incentivising your team with share ownership or share option plans can really help in creating the best ambassadors, boosting morale, increasing productivity or even reducing costs in the business.

Employee share schemes can be a cost-effective way of motivating your team and are increasingly being launched by businesses of all shapes and sizes and across many sectors.

How do employee share schemes work?

All share schemes operate slightly differently and with varying tax efficiencies, so it’s a good idea to seek advice from your business advisor or accountant (and often your lawyer) early on in this process, to make sure you set out on the right track.

What’s the difference between shares and options?

You can offer employees shares now – this gives the recipient real ownership, immediately. The alternative is to issue options that allows employees to buy shares at a later date (at an agreed price).

As an owner-managed business, what schemes could I consider?

There are three main share schemes that are often well-suited to owner-managed businesses. As a brief overview, these are:

• Outright issue of new shares
• EMI (Enterprise Management Incentive)
• Flowering/Freezer share scheme

In an outright issue of new shares, essentially the employee buys or is gifted shares at their market value – there are no restrictions on who can benefit or how many shares they can acquire.

EMI schemes can be particularly useful for incentivising employees, as there can be certain conditions attached to the share options, such as employee performance, or the company meeting a specified turnover.  The employee must then meet these criteria in order to exercise the shares.

A flowering/freezer share scheme allows employees to buy-in to the business with reduced tax implications, as the value of shares with restricted rights can be seen as reduced.

You can read more key points and benefits about the most popular employee share schemes in a recent blog by my colleague, Helen Fraser.

What about tax implications?

As far as HMRC is concerned, the main concept in offering shares to individuals is that they are receiving something of value by virtue of the work they do for the company. As such, HMRC will look to tax them to the value of the shares they could receive. However, the tax efficiencies and timings depend on the particular scheme.

For example in an EMI, there is no tax charge to the employee when the options are granted, meaning that tax is only paid when the shares are exercised, at the earliest.

How can you make sure that your company is protected?

Of course as more shares are issued, each share you own becomes a smaller percentage of the company. It is always important to consider the level of shares passed to others, with important considerations around rights for minority shareholders along with important company law points around owning 75% or more of the voting shares.

If you’d like to know more about incentivising and rewarding employees and Employee Share Schemes, you can listen to the latest episode of our 2 + 2 podcast.