Companies and employees both greatly benefit from employee share schemes which are authorised by HMRC. Such schemes help recruit, retain and incentivise employees by ensuring that they receive a direct financial interest in the success of the company. Large companies can utilise employee schemes in such a way as to compete for high-quality staff against quoted or known-brand companies.
Smaller companies and start-ups with hardly any immediate revenue can provide alternatives to salary as a way of attracting and rewarding key employees. Companies can also ensure that their employees focus on specific targets such as productivity or profitability by linking entitlements under these share schemes to individual departmental or company performance.
- Employee share schemes authorised by HMRC include:
- Enterprise Management Incentives (“EMI”);
- Company Share Option Plan (“CSOP”);
- Save As You Earn (“SAYE”); and
- Share Incentive Plans (“SIP”).
Tax benefits are offered to both employees and employers by tax-advantaged share schemes. Usually, employees will be taxed and must also pay national insurance contributions (“NIC”) on the market value of any shares given to them by their employer, as if it was part of their earnings. If the employee pays in part for their shares, they pay tax on the remaining gift element. If the employee can opt to acquire shares at a future date, rather than the shares themselves, the tax liability can be deferred until the option is exercised (provided it is exercised within ten years of the grant), although tax and NIC will be payable at that time.
However, under tax-advantaged share schemes approved by HMRC, participants will not pay income tax or NIC on the:
- purchase of shares at less than their market value;
- receipt of free shares;
- grant of an option to buy shares; and
- exercise of an option to buy shares.
Two key examples of such tax-advantaged schemes are the SIP scheme which allows shares to be given to an employee free of tax, and an EMI scheme which allows options to be granted and exercised, free of tax. In both schemes, certain conditions must be met to be relied upon. It is important to note that employees may still have to pay income tax on any dividends they receive as owners of scheme shares and capital gains tax when they sell their shares.
HMRC published its annual report on Employee Share Schemes (ESS), on 30 June 2022. The report evaluated the options granted, exercised and income tax and NIC tax relief received across the four schemes for the tax year ending in 2021. It positively shows that an increasing number of companies are utilising these schemes and reaping the benefits. The highlights of HMRC’s report are that:
- in total, 16,330 companies were operating employee share schemes in the tax year ending 2021, representing an increase from 6% from the previous year (and 88% since the tax year ending in 2010). The main driver of this trend is the increase in the number of EMI schemes;
- the total value of options granted over the four schemes exceeded £4bn; and
- through these schemes, employees received an estimated £480m in Income Tax relief and £280m in National Insurance contributions relief.
SIP and SAYE schemes represent the largest value in total options granted. This is most likely because such schemes are all-employee schemes whereas EMI and CSOP schemes are where only select employees are granted options at the sole discretion of the employer. Notably, however, the EMI scheme had the highest relievable gain of £750m, and income tax and NIC relief of £400m. Therefore, whilst the SIP and SAYE schemes have a higher value of total options granted, the EMI scheme in particular has a much higher average option granted and average gain per employee.
All in all, it is evident that EMI schemes continue to be an attractive way to offer a high level of remuneration for employees, as demonstrated by the increasing number of companies using them.
How can JLN help?
JLN has significant experience and expertise in advising on, and putting into place EMI schemes. We would be happy to help and discuss a suitable fee mechanism to suit your needs. For more information, please see our EMI Share Option Schemes services page here.