Is a share scheme the solution? Current economic trading conditions mean that now more than ever businesses need to both recruit and retain high calibre employees.
Why use a share scheme?
Employees are motivated if their reward is directly related to the success that they help to generate. This could be achieved with a cash bonus related to profits, however, this can lead to a focus on short term profits rather than sustainable growth. In addition, a cash bonus means that cash has to be found to pay the bonus at a time when many businesses are facing restricted access to finance. Share options are therefore an increasingly relevant answer to the commercial need to incentivise staff.
Government Approved Tax Efficient Share Options
The government recognises the value of incentivising growth in this way and as a result there are a number of approved share schemes that offer tax breaks to an already attractive commercial option. Details of the various schemes can be found on our website.
The most commonly used of these approved share option plans is the Enterprise Management Incentive or EMI. This scheme is designed for use by independent trading companies or groups with gross assets of less than £30 million and less than 250 staff. Any number of employees can be included, provided that the total value of options does not exceed £3 million. The maximum value of EMI options for any single employee is £250,000.
The option terms can be very flexible and performance conditions may be attached. Shares may be non-voting and employees can be required to give up their shares on leaving employment.
The other approved share option plans tend to be more restrictive, although they may be of interest, particularly if a reward scheme for all employees is required.
Tax Advantages of an EMI
The specific rules set out in the legislation means that EMI options are far more tax efficient than cash bonuses. On exercise the growth in value of the shares will be subject to Capital Gains Tax, with current tax rates ranging from 10% to 20% depending upon the circumstances. By comparison a cash bonus may be subject to income tax at 40% plus and both employees and employers NIC would also be due. In addition if the employee has not used their annual exemption for capital gains tax in the year of exercise, the first £11,100 will be tax free based on rates for 2016/17.
Together with the employee your business will enjoy the increase in value of the shares as a corporation tax deduction equivalent to the market value of the shares on exercise.
As anyone in business knows the incentive to work hard is in the after tax ‘profit’. As income tax rises, the comparative post tax value of an EMI share option relative to a cash bonus makes this an increasingly attractive reward to the individual, whilst at the same time reducing the cash requirement of your business.
For further information and advice on employee share schemes please email tax@streetsweb.co.uk
