Giving employees shares in the company for which they work can help to attract, retain and motivate staff and align their interests to those of shareholders. There are a wide range of such incentives available, including HMRC tax advantaged arrangements that offer beneficial tax treatment but are subject to legislative requirements, as well as more flexible arrangements which may better suit the commercial objectives of the company.
We can advise on the design, establishment, implementation and ongoing operation of these arrangements including the following:
EMI (Enterprise Management Incentive) Options
EMI options allow employers to give employees rights to acquire shares in a company with an underlying value of up to £250,000 in a way that gives tax advantages both to the employer and to the employee but without any upfront costs or risks for the employees.
EMI options are discretionary arrangements, so the directors may choose to whom options are granted and may also offer options to different employees on differing terms.
No tax or National Insurance Contributions (NICs) are due when an EMI option is granted, and providing the statutory requirements are satisfied and the option exercise price equals or exceeds the market value of the option shares on grant there will usually be no income tax or employee’s or employer’s NICs to pay when the option is exercised. In addition, the employee will often benefit from a reduced rate of capital gains tax if the shares are subsequently sold at a profit.
EMI options may only be granted by independent trading companies or independent holding companies of a trading group with gross assets of less than £30 million and no more than 250 full time equivalent employees. A number of other conditions must also be satisfied. Please read our EMI Share Option Guide for details.
CSOP (Company Share Option Plan) Options
CSOP options (also known as approved share options) allow employers to grant market value options over shares in a company with an underlying value of up to £30,000 in a way that gives tax advantages both to the employer and to the employee but without any upfront costs or risks for the employee. The value of the underlying shares must be agreed with HMRC.
CSOP options are discretionary arrangements, so the directors may choose to whom options are granted and may also offer options to different employees on differing terms.
No liability to tax or NICs arises on the grant or qualifying exercise of a CSOP option, though the employee may have to pay capital gains tax if the shares are later sold at a profit.
CSOP plans are useful for those companies that are either too large or are otherwise unable to grant EMI options. They are of particular interest to the UK subsidiaries of overseas companies, as it is often possible to add a CSOP schedule to an overseas plan allowing UK employees to benefit from favourable tax treatment.
Please contact us if you would like more information on CSOP plans.
SAYE (Save as You Earn) Options
SAYE options (also known as savings related share options) are market value options linked to a savings contract. The value of the underlying shares must be agreed with HMRC. If a company operates an SAYE scheme, all eligible employees must be invited to participate, though only those who agree to make regular savings will be able to acquire shares.
Employees save an amount of their choosing up to a maximum of £500 per month over either a three or five year period by deductions direct from net salary which are held by a bank or building society. An option is granted over such number of shares as could be bought at market value at the date of grant with the projected total savings for the three or five year period. At the end of the savings period an employee can use some or all of the savings to exercise that option, or can simply let the option lapse and use the savings for other purposes. The employee can also choose to end the savings contract early and withdraw the money, but the option will then lapse.
No liability to tax or NICs arises on the grant or exercise of an SAYE option, though the employee may have to pay capital gains tax if the shares are later sold at a profit.
SAYE options can be granted in conjunction with any other type of tax advantaged option arrangement as the value of shares subject to SAYE options does not count towards the limits on the grant of EMI or CSOP options.
Please contact us if you would like more information on SAYE schemes.
Share Incentive Plans (SIPs)
SIPs (originally known as All Employee Share Ownership Plans or AESOPs) are tax advantaged arrangements where shares are acquired at the outset but are held within a UK based employee trust. If a company operates a SIP all eligible employees must be given the opportunity to participate. There are four types of awards that may be made under a SIP:
Free Shares – the employer gives all employees shares of up to £3,600 value per person per year which are held in a trust. No charge to income tax or NICs arises on the gift of Free Shares.
Partnership Shares - employees can choose to buy shares out of gross salary with a value of up to £1,800 per year. This means that the employer company also saves the employer’s NICs that would otherwise be due on the amount used to buy Partnership Shares.
Matching Shares – if an employee buys Partnership Shares, the employer may provide additional Matching Shares. The employer chooses the ratio of partnership to matching shares but subject to a maximum of 2 matching shares for every partnership share. No charge to income tax or NICs arises on the gift of matching shares.
Providing the Free Shares, Partnership Shares and Matching Shares stay in the trust for at least five years, no charge to tax arises when the employee removes the shares from the trust, and capital gains tax will only be payable on any increase in value after the date of removal. However, if shares are removed within that five year period a charge to income tax (and, if applicable, NICs) will arise.
Dividend Shares – where Free, Partnership or Matching Shares are held in an employee’s trust, then if the company declares a dividend it may choose instead to provide additional shares to employees of a market value equal to the dividend that would otherwise be due. No charge to income tax or NICs arises on the gift of such Dividend Shares.
SIPs are particularly suitable for larger companies and those with an established workforce and low staff turnover.
Please contact us if you would like more information on SIPs.