Employee equity options

Employee share schemes are growing in popularity among UK businesses.

According to HM Revenue & Customs (HMRC) figures, 16,330 companies were operating an employee equity share scheme in the tax year ending in 2021, up 6% on the previous year.

The schemes meant employees received an estimated £480 million in income tax relief and £280 million in national insurance contributions relief.

Benefits of employee equity schemes for employers

There are various reasons why employers might want to set up an employee share scheme, including:

Attracting new employees

Running a share scheme can help you to attract talented staff and stand out from other businesses that don’t offer equity.

They are particularly useful for early-stage start-ups that don’t have the funds to offer big salaries but can provide shares and incentivise new staff to support the growth of the business.

Motivate existing employees

Having equity in the company may help motivate employees and increase productivity because they have a vested interest in the business's success.

This may help to improve staff loyalty and reduce staff turnover.

Tax efficiencies

Offering shares is a tax-efficient way to remunerate employees.

The employee receives income and national insurance relief, and employers can benefit from corporation tax relief.

Employers can use the tax savings elsewhere, such as improving other staff benefits and becoming an even more attractive employer.

Reduce costs and improve cash flow

Providing share options rather than increasing salaries can cut the cost of employees to the business and improve cash flow.

What types of employee share schemes are available?

Through employee share schemes, staff pay no income tax or national insurance if certain conditions are met.

Employers may also be entitled to Corporation Tax relief.

There are four main share schemes approved by HMRC:

Save As You Earn (SAYE)

Employees can save up to £500 a month from their salary.

After three or five years, they can buy shares at a fixed price.

If employees complete the savings plan, there’s a tax-free bonus.

Share Incentive Plans (SIP)

There are four types of SIP shares:

• Free shares – An employee can be gifted up to £3,600 free shares in a tax year.
• Partnership shares – An employee can spend £1,800 or 10% of their total salary in a tax year, whichever is lower.
• Matching shares – Employers can give each employee up to two shares for every partnership share they buy.
• Dividend shares – If a shareholder gets dividends on their shares, they might be able to buy more shares.

Company Share Option Plans (CSOP)

Employees can buy up to £30,000 worth of shares at a fixed price.

No income tax or national insurance has to be paid on the difference between the amount employees pay and what they are actually worth.

In the government’s Growth Plan unveiled on 23 September 2022, it was announced that qualifying companies will be able to issue up to £60,000 of CSOP options to employees from April 2023.

Enterprise Management Incentives (EMI)

EMI is for businesses with assets of less than £30 million and fewer than 250 employees.

Employees can be granted share options up to the value of £250,000 in any three-year period.

EMI explained

Enterprise Management Incentives (EMI) is one of the most popular share schemes in the UK, particularly for smaller businesses.

HMRC figures show that it was the main driver behind the 6% increase in companies offering equity schemes in 2020/21 compared to the previous year.

As companies can offer total share options up to the value of £250,000 in a three-year period, which is much higher than other schemes, EMI is an attractive way to remunerate employees and attract new talent.

No national insurance or income tax has to be paid if the shares were granted for at least the current market value.

If less than market value, income tax or national insurance must be paid on the difference.

When EMI options are exercised, a business can benefit from Corporation Tax relief on the difference between the market value when the shares are acquired and the amount that the employee pays for them.

To run an EMI scheme, companies must:

• be trading in the UK with at least 50% of sales in the UK
• have gross assets worth less than £30 million
• have less than 250 full-time equivalent employees
• not be in an excluded sector such as banking, farming, or accountancy
• be independent and not a subsidiary of another company that owns or controls 50% of its ordinary share capital.

To receive shares, an employee or director must:

• work for the company for at least 25 hours per week or 75% of their available working time per week
• not own in excess of 30% of the company’s ordinary share capital.