What tax-efficient business share schemes are there?

11 August 2023

What tax-efficient business share schemes are there?


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Employee share schemes provide a great way to incentivise, retain and give employees a current or future stake in your business. They can help to improve loyalty to the company and motivate your employees where a normal remuneration package of salary, bonuses and benefits may not. They can also be a useful tool for attracting new employees to the business.

There are many different schemes that are tax-efficient business share schemes, including Employee Management Incentives (EMIs), Share Incentive Plans (SIP) and others. Some schemes are HMRC-approved, and others are unapproved.

Introducing an employee share scheme could benefit both your employees and your business, as there can be significant tax advantages over other forms of remuneration.

In this blog, we look at HMRC-approved schemes and their advantages.


How do company share schemes work?

Employees are given the option to purchase shares in the business for which they work at a price set at the time the option is granted. Even if the share price increases after that date, the employee has the right to buy at the price originally agreed.


HMRC-approved share schemes

There are a number of HMRC-approved schemes as follows:

  • Enterprise management incentives (EMIs).
  • Company share option plans (CSOP).
  • Share incentive plans (SIP).
  • Save as you earn (SAYE) schemes.

An approved scheme can be less flexible than an unapproved scheme. However, using an HMRC-approved scheme can have significant tax advantages for both employees and employers.

See below for more information on the above schemes.

Enterprise Management Incentives (EMIs)

Using an Enterprise Management Incentive Scheme (EMI) enables you to not only incentivise and retain key management team members but will also help you to buy into the overall strategy of the business.

With an EMI option scheme, key employees have the option to buy shares in your company at some point in the future. The price the employee pays for the shares will usually be their value at the time the option was granted. If shares rise, the employee ends up paying a discounted price on the current market value. The employee doesn’t have to exercise the option to buy if the share value hasn’t increased.

Tax benefits of Enterprise Management Incentives

There are some advantageous tax benefits from both an individual and company perspective, and these are below:

Individual tax benefits: No income tax or NI contributions unless disqualified. Capital Gains Tax (CGT) payable on the sale of shares (potentially at 10% provided that the shares are sold two years or more after the grant of the option, and the holder has been a director or employee for two years or more prior to the sale).

Company tax benefits: Corporation Tax deduction on option gains and no NI contributions.

 Other benefits of an EMI scheme

EMI schemes can have multiple benefits, including:

  • Drive performance by tying into targets.
  • Retain key staff.
  • Cost-effective as there is a low upfront cost.
  • Build buy-in to long-term strategy.

Company Share Option Plans (CSOP)

Although they’re not as commonly used as EMIs, Company Share Option Plans (CSOP) are also a HMRC-approved, tax-advantaged discretionary share option plan under which a company may grant options to any employee or full-time director.

There are no limits on company size or number of employees, unlike EMIs, so a CSOP can be used by larger companies. However, this does mean that a CSOP can be more restrictive than an EMI.

A CSOP is a more restrictive regime than EMI in that:

  • Options must be granted at market value;
  • Each employee can only be granted up to £60,000 of options; and
  • The gain is only exempt from income tax if the options are held for at least three years.

These types of scheme are popular with larger corporates and often used a sub-plan for UK subsidiaries of overseas groups of companies.

Benefits of Company Share Option plans

The CSOPs tax reliefs are very generous for employees. Options can be exercised without any income tax or National Insurance Contributions (NIC) liability arising provided certain conditions are met.

The company will generally qualify for a corporation tax deduction equivalent to the amount of gains realised by the employees on the exercise of their options.

Share Incentive Plans (SIPs)

Share Incentive Plans (SIPs) are tax and National Insurance contributions (NIC) advantaged plans that help employers encourage employees to hold shares in the company they work for.

Under a SIP, an employer can give staff up to £3,600 worth of free shares a year. They are one of the most tax-efficient schemes but they must be open to all eligible employees.

Tax advantages of Share Incentive Plans

There are several advantages to your employees of a Share Incentive Plan including:

  • Employees who take part in a Share Incentive Plan will have the opportunity to pay no tax or NICs on the shares they acquire under the plan.
  • Whether an employee will have to pay any tax or NICs on a particular acquisition of shares will depend on a number of factors, including the type of plan shares and how long the shares are held in the plan.
  • Under a Share Incentive Plan, an employee can purchase partnership shares out of their gross salary before tax and NICs are deducted, which reduces the amount of salary on which they will have to pay tax and NIC.
  • There is no tax charge on certain dividends paid on plan shares used to buy further shares (‘dividend shares’) that remain in the plan for at least three years.

Employers also get a tax advantage of a SIP as corporation tax relief is available for establishing, contributing to and administrating the Share Incentive Plan.

Save As You Earn

Employees are granted options that allows them to acquire shares in the company after three or five years.

The price at which options are granted over company shares can be discounted by up to 20% of the market value of the shares at the date of grant.  Employees can save up to £500 a month under the scheme. At the end of the savings contract (3 or 5 years), they can use the savings to buy shares.

The SAYE plan must be operated on an ‘all-employee’ basis. Each employee must enter into a savings arrangement for the same period as the length of the option: monthly savings are made from post-tax salary. This is a savings-related share scheme where you can buy shares with your savings for a fixed price.

Benefits of Save As You Earn

The advantages for employees are:

  • The interest and any bonus at the end of the scheme is tax-free
  • Employees do not pay Income Tax or National Insurance on the difference between what they pay for the shares and what they’re worth

They might have to pay Capital Gains Tax if you sell the shares. They won't pay Capital Gains Tax if they transfer the shares to an ISA within 90 days of the scheme ending or to a pension, directly from the scheme when it ends.

Benefits to an employer are:

As well as employees receiving tax benefits under SAYE schemes, you can treat a SAYE scheme as an expense for corporation tax and therefore reduce your corporation tax bill.

Because even your lower-paid staff can participate, they are a good way to get all members of your team behind your business goals.

Employee Ownership Trust (EOT)

An Employee Ownership Trust (EOT) goes further than most of the schemes above in that it gives the employees a controlling interest in the company through a trust-based arrangement.

Employee ownership share trusts can be a great way for a business owner to plan their exit and can be a simpler and more tax-efficient alternative to selling a business via a trade sale and can help to protect business continuity.

An Employee Ownership Trust (EOT) is a tax-incentivised scheme that transfers control of a business for the benefit of employees. An EOT acquires a controlling interest in a company from current shareholders. Employees don't directly own the shares, but the shares held by the trust are used to the benefit of employees.

Find out more about how an Employee Ownership Trust works here.


Unapproved employee share schemes

An unapproved share option is just a non tax-advantaged scheme.  This is when a business offers a scheme that is not part of HMRC's approved employee share schemes.

However, as with approved options, there is no initial tax cost up-front.  Any gain on exercise will be taxed as employment income, and these are typically used as top-ups to approved schemes.

How can Haines Watts help with Employee share schemes?

Setting up a scheme in the right way can be complex. We can work with you to map the goals of both the business and you, the owner and then work out who the scheme will be offered to and how it will be structured to ensure it works towards your goals.

With the right advice and planning, this type of key employee incentive can have a significant impact on your business and give you the peace of mind that your management team or key employees are highly incentivised, motivated, and bought into your vision and the future of the company.

 Read more about the best ways to incentivise management teams & key employees in our blog.

For further help and advice in incentivising and retaining your key people or setting up a share incentive scheme, contact us at our offices in Liverpool, Chester or Wirral.