Incentivising employees by giving them a slice of the action
Over the past couple of years, wages have kept pace with inflation, but official figures from the Office for National Statistics show that pay rises are slowing down and the jobs market is starting to weaken. Experts say that high interest rates will see wage growth slow even further next year.
I t is not surprising then that many small businesses are looking at other ways to incentivise their employees, with share schemes becoming an increasingly popular option, especially for cash- strapped start-ups. Giving staff a stake in the business can assist with the retention of key personnel, increase productivity, and improve cashflow but there are many different share schemes – which one do you choose? The share scheme that is right for your business will depend on the size of your company, whether you want to give shares now (or options to buy shares in the future) and what you are hoping to achieve from the scheme. It will also depend on whether you are looking to incentivise all of your employees, just some of them or whether you want to give a stake in the business to someone external to the organisation (e.g. “sweat equity”).
EMIs and CSOPs will almost always be the top choices for companies that qualify but for those that don’t (or where the £250,000 or £60,000 limits are not sufficient), unapproved option arrangements (or other non-advantaged schemes) might be considered. Non-advantaged schemes can be quicker to set up, easier to administer and have other benefits. Unapproved share option schemes for example are particularly flexible: Can be used to reward external advisers and consultants as well as employees. No minimum or maximum period during which options must be exercised. Company can set any exercise price it wishes; • Can also impose restrictions or targets in relation to the shares that align with its plans for future growth of the business. The downside is that there is no tax advantage to be gained, with PAYE being applied to the difference between the market value of the shares and the price paid by the individual to acquire them (in the same way as if they had received the equivalent amount of salary). Other unapproved share arrangements, such as growth shares , have a less punitive tax treatment. This simple arrangement involves setting up a new class of shares and is often
used by private companies for employees who have been recruited at a later date to ensure that those individuals only share in the future growth of the business and do not benefit from their predecessor’s efforts. Any income tax or NIC charge will be based on the value of the growth shares at the time the employee acquires them and typically, advisers will argue that these shares have little or no value at that point in time when there has not yet been any growth… although HMRC sometimes has other ideas! Finally, if you wish your trading business to be fully employee-owned, Employee Ownership Trusts (EOTs) are also worth considering. EOTs have become increasingly popular in recent years and come with various incentives for shareholders and the ability to pay tax-free bonuses of up to £3,600 a year to employees. Contact Sam Stent or the Tax Advisory Team at Scrutton Bland by calling 0330 058 6559 or emailing hello@scruttonbland.co.uk if you are considering implementing a share scheme as we can help you find the one that best meets your needs. We can also assist with Employment Related Securities (ERS) scheme registrations and annual compliance and can advise on the more complex tax obligations that arise for globally mobile share scheme members.
Firstly, let us look at the 4 share schemes that are approved by HMRC, (see opposite page):
4 | SCRUTTON BLAND | TECH BUSINESS
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