Share schemes are a popular method of incentivising employees. The basic premise is the employee is rewarded for the growth in value of the company which they have themselves contributed to.
Share schemes, including share option schemes, can be tax-advantaged or non tax-advantaged. Tax-advantaged plans confer tax benefits on the shares/options issued. As is to be expected, the terms and criteria for tax advantaged qualification are specifically defined by HMRC. Any share scheme drafted outside of HMRC’s rules is a ‘non tax-advantaged’ scheme
The current tax-advantaged plans are:
Where the criteria can be met the EMI is currently the most tax beneficial option scheme in the UK. See our EMI Quick Guide.
Where plans do not fall into one of the above tax advantaged schemes then they will either be:
There will usually be an employment connection linking the awards made and tax rules in relation to what are known as “employment-related securities” will need to be considered.
The main choices for incentivising employees will usually be between:
A cash bonus is self-explanatory, but it can also be linked to the share growth of the company through a ”phantom” share plan.
A share award requires the drafting of potentially complex legal documents that create a binding contract between the parties. The shares to be acquired will have a monetary value that will often need to be determined by means of a valuation. This value is that at which either
Share options provide a good halfway house between cash bonuses and share awards and are a great way to provide incentives without diluting the equity interest. The option arrangements will also need legal drafting and the value of the options to be acquired will need to be determined by means of a valuation. For a tax approved option, there will however usually be no tax or national insurance on grant or exercise of the option. This is usually a win win for both the employee and the employer.
As an employer, there are strict reporting requirements that will need to be adhered to for all kinds of share schemes.
Where a company grants share options to its employees without using one of the tax advantaged schemes listed above, the employees will be subject to Income Tax when they exercise the option. This exercise will usually need to be reported by the employees in their self-assessment tax return.
Where however a share (or other qualifying asset) acquired by the employee is what is known as a “readily convertible asset”, both Income Tax and National Insurance contributions are due on the money’s worth of the shares; and these amounts must be collected by the employer through the payroll.
There are also a number of Income tax and National Insurance elections that will need to be considered.
Growth shares are a special class of shares created so as to provide equity incentives to management and key employees. Members are rewarded for the growth in value of the company above a specified threshold. Growth shares can be used both as a tax-efficient alternative to options or, in certain circumstances, as part of a share option scheme.
While share and option schemes are great for incentivising employees, please note that this is a specialist area that requires specialist advice. Oury Clark would be happy to assist and advise you in this process. If this is an area which you would like to receive further information, please contact us to arrange a meeting.